Why Courage Is Fundamental To Trading Success

As nosotros tin meet from the inwards a higher house chart, which tracks the five-day moving average of VIX versus the SPX for the past times 3 years, of import lows inwards markets bring tended to meet spikes inwards short-term implied volatility (credit to Index Indicators for the nautical chart in addition to information below).  

Interestingly, if nosotros bought SPX when the five-day moving of VIX was less than 15, the adjacent v days inwards SPX averaged a loss of -.04%.  That would bring resulted inwards a cumulative loss of -3.42% during a menstruum inwards which the marketplace rose past times nigh 47%!

Conversely, if nosotros bought SPX when the five-day moving average of VIX was greater than 15, the adjacent v days inwards SPX averaged a gain of +.52%.  That would bring resulted inwards a cumulative gain of nearly 41%, versus the buy-and-hold of 47%.  In other words, the vast bulk of the market’s gains bring occurred during periods of elevated short-term volatility.

My indicate hither is non to advise a trading system, though it’s non hard to conceptualize ane from the reckon of relative volatility spikes.  Rather, the indicate is that comfortable markets–those amongst pocket-size volatility–have yielded negative returns.  Uncomfortable markets bring yielded the mass of marketplace returns.  

A trader’s returns bring been straight proportional to his or her ratio of courage to fear.  Buying ugly markets has made superior returns; stopping out of long positions on ugliness has led to negative timing alpha.  Buying stocks when fearfulness is gone in addition to markets are orderly has non paid off.  

If there’s a formula for trading success, prudent courage is non a bad start.  If there’s a formula for trading failure, acting on fear–fear of missing out, fearfulness of losses–is besides non a bad start.  It’s amazing how ramping upwards trading risk/size in addition to trading frequency tin plough prudently courageous traders into fearful ones.  If there’s a formula for risk-taking, trading the largest size that enables yous to remain prudently courageous during times of ugliness is a skillful starting point.

Further Reading:  Why Success Lies on the Other Side of Fear
.

Leave a Reply