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Rolling The Trade: One of the Risk Management Tools in Our Kit
One thing very common in the world of options trading is this idea of "rolling" your trade.
You can either roll your trade by changing its strike, duration, or both. And the purpose of rolling the trade is to re-position yourself to increase your chance of profit again. Or keep the dream alive that the position will payout.
In our strategy, the concept is the same. We know it's not uncommon to get caught on the wrong side of monster moves. In these cases, it can sometimes make sense to "roll the trade" to a different "fair value" period.
By doing this, we are typically able to reduce risk by booking profits on our most recent entries and lowering our overall exposure on the pair. This gives us more dry powder to re-add should price continue to run relative to our rolled "fair value".
The whole point of rolling is to reduce risk and increase the probability of exiting the trade at least at break-even or with a small profit.
Below is an example of a trade I rolled recently on EUR/NZD.
You can see my 3 entries on this pair as price continued to ramp up. On all of these, I was targeting the 200MA as my exit at "fair value". But price was running pretty hard so it became obvious that exiting at my current target would result in a small loss.
So in order to increase my probability of profit on this trade, I rolled my target to the 4HR chart's "fair value" (800 MA on the 1HR chart) and closed at about 50% max profit for an overall profit on the position.
Again the purpose of rolling a trade is to decrease risk. You can see by rolling to the 4HR's "fair value", I drastically increased the probability of getting into profits on my average entry, because I re-oriented with the market giving myself a large profit potential that will take theta a long time to eat up.
This gives me the ability to turn a profit on the position without needing to deploy any additional capital. In a lot of cases, once you roll, you can usually book profits on your later entries, which will reduce your risk even further and allow you to average down at an even higher price should the run continue.
As with all money management though, you can not roll indefinitely or else you will eventually pinch yourself with too much risk.
Personally, I never roll more than 1 time, and once you have rolled, the real goal of that position is to simply get out at least break even. You aren't looking to turn a huge profit with the new large spread you have made available. You are looking to extend duration so the probability of you turning this potential loss into break-even or better is increased.
I have also recently done this on my GBP/NZD short. On this roll though, I was able to book my 2 most recent orders with a small profit, while reducing my position size by 1/2.
By doing so, I know have a much smaller position (less risk), and I also have a much larger potential profit that will take theta a good amount of time to work through. And because my risk is reduced, should the price continue to run, I can average down at a better price than before, overall putting myself in a much better position to turn a profit. And again, I will not be looking to get out at the 4HR chart's fair value. I will get out before then, most likely at break-even for the average entry of my 2 orders that are still on (assuming I don't need to add any more positions to the trade).
One thing very common in the world of options trading is this idea of "rolling" your trade.
You can either roll your trade by changing its strike, duration, or both. And the purpose of rolling the trade is to re-position yourself to increase your chance of profit again. Or keep the dream alive that the position will payout.
In our strategy, the concept is the same. We know it's not uncommon to get caught on the wrong side of monster moves. In these cases, it can sometimes make sense to "roll the trade" to a different "fair value" period.
By doing this, we are typically able to reduce risk by booking profits on our most recent entries and lowering our overall exposure on the pair. This gives us more dry powder to re-add should price continue to run relative to our rolled "fair value".
The whole point of rolling is to reduce risk and increase the probability of exiting the trade at least at break-even or with a small profit.
Below is an example of a trade I rolled recently on EUR/NZD.
You can see my 3 entries on this pair as price continued to ramp up. On all of these, I was targeting the 200MA as my exit at "fair value". But price was running pretty hard so it became obvious that exiting at my current target would result in a small loss.
So in order to increase my probability of profit on this trade, I rolled my target to the 4HR chart's "fair value" (800 MA on the 1HR chart) and closed at about 50% max profit for an overall profit on the position.
Again the purpose of rolling a trade is to decrease risk. You can see by rolling to the 4HR's "fair value", I drastically increased the probability of getting into profits on my average entry, because I re-oriented with the market giving myself a large profit potential that will take theta a long time to eat up.
This gives me the ability to turn a profit on the position without needing to deploy any additional capital. In a lot of cases, once you roll, you can usually book profits on your later entries, which will reduce your risk even further and allow you to average down at an even higher price should the run continue.
As with all money management though, you can not roll indefinitely or else you will eventually pinch yourself with too much risk.
Personally, I never roll more than 1 time, and once you have rolled, the real goal of that position is to simply get out at least break even. You aren't looking to turn a huge profit with the new large spread you have made available. You are looking to extend duration so the probability of you turning this potential loss into break-even or better is increased.
I have also recently done this on my GBP/NZD short. On this roll though, I was able to book my 2 most recent orders with a small profit, while reducing my position size by 1/2.
By doing so, I know have a much smaller position (less risk), and I also have a much larger potential profit that will take theta a good amount of time to work through. And because my risk is reduced, should the price continue to run, I can average down at a better price than before, overall putting myself in a much better position to turn a profit. And again, I will not be looking to get out at the 4HR chart's fair value. I will get out before then, most likely at break-even for the average entry of my 2 orders that are still on (assuming I don't need to add any more positions to the trade).
ri · skuht
I have created a new toy for you guys! The indicator attached to this post is for MT5 and looks like this:
It mainly does three things:
The gap between the current price (green line) and the predicted intercept (blue line) is your potential profit. I find it interesting to see in the movie that a large spread is not necessarily a large profit. Sometimes the spread is large but the blue and green lines almost overlap! Also, sometimes the blue line is at the "wrong" side suggesting not mean reversion but mean aversion!
Here is the indicator:
For those interesting the technical details:
Naturally, next on my list is to embed this algorithm in an Expert Advisor and see what that brings...
- It predicts how the SMA200 will develop in the future (red and gray lines, median, +/- 1 sigma, +/- 2 sigma respectively)
- It shows after how much time and at what price the market did intercept the SMA200 in the past (red dots)
- It calculates at what future price the market will most likely intercept the SMA200 (blue line)
I created a short movie showing the indicator in action:
Inserted Video
The gap between the current price (green line) and the predicted intercept (blue line) is your potential profit. I find it interesting to see in the movie that a large spread is not necessarily a large profit. Sometimes the spread is large but the blue and green lines almost overlap! Also, sometimes the blue line is at the "wrong" side suggesting not mean reversion but mean aversion!
Here is the indicator:
For those interesting the technical details:
1. It draws the SMA200 moving average of the past price data (red line)
2. It calculates the current "spread": the distance between current price and the SMA200.
3. It searches backwards over the last 4 years ("LookbackDays" input parameters) to similar occurances of that same spread. Similar is defined as occurances where the distance was within +/- TolerancePoints points (not pips) of the spread we see currently.
4. It calculates how the current(!) SMA(200) would develop if price would move similarly as it did during these occurances. Note that this means we combine the last few recent bars, with the old bars we saw in the past. The old prices are scaled accordingly towards the current price. The SMA200 is calculated using this mix of old and new bars.
5. Of all these occurances, it draws the median (red line), the +/- 1 sigma and +/- 2 sigma lines (gray lines).
6. Of all these occurances, it calculates the number of bars it took before the SMA200 was intercepted, and at what offset relative to the starting price (again scaled accordingly towards the current price). It will draw a red dot showing where the current market would intercept if price action would be identical.
7. It calculates the average price of all the red dots and draw a blue line at that average price. Note it does not use the median price (most likely event), but the average price (the expectancy) because the outliers of the past could happen again and can pull the average away from the median.
Naturally, next on my list is to embed this algorithm in an Expert Advisor and see what that brings...
