Trading, Overtrading, and Waiting

Fri, Sep 28, 2007 | Jared Woodard


One of the truisms that gets tossed around in [tag]trading[/tag] circles is that “entries don’t matter.” This is counterintuitive for many traders, especially new traders, who will spend hours or even days looking for “the perfect setup,” the trade with such great odds of success that it just can’t fail. The problem is, any trade can fail, and when you add in the second half of that truism, it makes a lot more sense: “entries don’t matter; exits do.” In other words, there’s no such thing as a perfect setup or flawless entry signal, and just as a graceful exit can turn a tenuous trade into a confirmed winner, a botched exit can make a total loser out of even the nicest of entries. It’s always better to look at the whole life of a trade.

We’re not particularly big on [tag]trading psychology[/tag] (maybe because we’re in psychological disarray in so many other areas that our trading mindset gets pushed way down the list, lol) – but there’s definitely some value in thinking about how your strategy should work in different circumstances in advance so that you aren’t caught off guard when those unexpected circumstances do arise. Looking at each trade as a whole has a lot to do with this. So let’s look at three aspects of our strategy that relate to these questions of preparation and holistic thinking: trading, overtrading, and waiting.


One of the principal advantages of the [tag]iron condor[/tag] strategy is that it requires very little actual trading. In other words, you can be a lazy, undisciplined jerk and still not necessarily get clobbered. (Not that we advise this approach or anything.) As you probably already know, an iron condor is a four-legged market-neutral credit-producing trade that is best entered four or more weeks before expiration, and best exited 4-10 calendar days before expiration (or allowed to expire worthless, if you think you’re some kind of hero cowboy). Given that iron condors are risk defined and non-directional, most of the work in trading them is done up front, and in that sense entries do matter a lot, more than in some other strategies. Exiting obviously matters, too, and occasionally these trades require some adjustment. But the process of trading itself is pretty straightforward. The biggest danger you’re likely to face when trading iron condors isn’t so much erroneous entries, though, but rather…


That’s right, overtrading is a constant temptation. Even though we’ve warned before about the dangers of [tag]adjusting iron condors[/tag], people constantly ask about this aspect of the strategy. And again, for the record: adjusting trades as a matter of common practice is actually riskier than just adding new trades! In other words, you’re always better off putting on a new position that takes account of the present market environment, rather than trying to “repair” or “adjust” every old or busted trade.

If you find yourself frequently watching your positions and wanting to tweak something here or modify something there, here’s a tip: don’t. Instead, if you have at least 6 months of experience trading iron condors, try this: sell a call or put spread that is contrarian to whatever the market is doing that day. For example, if the Dow is up 100 points, sell a [tag]DIA[/tag] call spread that is several strikes away from the current price. When the index moves back down a day or three later, sell a put spread that is several strikes away from the then-current price. Guess what? You’ve just legged into a nice iron condor. We should add that this little strategy should be done <em>with as few contracts as possible</em>. You’re not trying to lay on major positions, but simply to capture some market movement and avoid screwing up your other positions. We don’t officially endorse the notion of legging in to any trade that you actually care about, because it’s just too hard to accurately call the tops and bottoms of market movement on a consistent basis.

If that last paragraph is confusing or unclear, don’t worry: the only point to remember is that once you have some iron condors in place, <em>leave them alone</em> – they’ll thank you for it.


But what about those times when you don’t already have some nice trades in place? This last scenario is even tougher: watching days tick by with all of your capital just sitting in your account, undeployed, is frustrating and even infuriating. Having the discipline to wait for a good trade is sometimes so difficult it makes avoiding overtrading look easy. The constant temptation is to try to force something to work, and to enter a mediocre trade at a bad price. The most likely result of failing at the waiting game is that when the real action resumes, you’re left with a trade that is too narrow or too risky and is likely to end up as a loser. As far as iron condors go, selling condors in low [tag]volatility[/tag] environments is a common mistake that traders make, and they suffer for it when volatility pops and the trade is either threatened or is unchanged even after a week or two because of that new volatility environment.

The correct response to unfavorable conditions is to wait. As Warren Buffett says: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” One of the advantages that we traders have over market makers is that we don’t have to be in the market at all times – instead of having to provide liquidity and take the other side of trades we might not like, we have the ability to only enter trades of our own choosing. That ability should not be underestimated: it means that whenever conditions are unfavorable – whether that means low volatility, an upcoming market-moving news item, or whatever – we can always choose to wait for the next trade to come to us.

Our members know the importance of waiting because they watch us do it all the time. This month, for instance, we’re about three weeks away from expiration and we only have one position open (we usually trade 3 – 5 positions each month). Why? Because volatility has plunged, markets have rallied to very overbought levels, and we refuse to enter bad positions just to meet some hypothetical quota. Our members are smart enough to know that one good position is always preferable to two or three mediocre ones.


The ultimate point here is that it’s not enough to be able to recognize good trades and deploy a strategy. You also have to have the discipline to avoid overtrading and the patience to wait for good trades instead of trying to force bad ones. “Discipline” and “patience” may not sound as sexy or interesting as “negative gamma risk” or “exponential theta curves,” but those two prior qualities will take you farther than any strictly technical knowledge ever can.

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  1. Good to Go Pile . . . « Trading for the Masses Says:

    [...] Overtrading, and Waiting, talking my book once again. Today is over if you ask me, putrid volume and hence no [...]


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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