Have you ever wondered why experienced traders choose to change their credit spreads trading strategy, even when they’re achieving impressive results? In this article, we’ll explore the intriguing reasons behind a trader’s decision to shift from a tried-and-true approach to a new strategy, unlocking valuable insights for traders of all levels.

Reason for Change

The trader begins by explaining their transition from a 10 Delta to a 25 Delta strategy while still trading credit spreads. They emphasize the importance of understanding the changes they’ve made and the new rules and systems behind their strategy. By the end of this article, you’ll have a clear understanding of their approach and whether it’s worth considering for your own trading endeavors.

Existing Trading Strategy (10 Delta)

The trader starts by outlining their previous strategy, which was based on a 10 Delta approach. They claim to have maintained an impressive 84% win rate with this strategy, collecting roughly 15 cents per trade. This equates to making $15 for every winning trade while risking $35.

Expected Return Calculation

To justify the effectiveness of their strategy, the trader explains the concept of long-term expectancy value. They demonstrate that with an 84% win rate and the risk-reward parameters they use, they can achieve an expected return of $700 over a 100-trade period.

Trend Following Strategy

The trader then introduces the concept of trend following, a strategy they’ve adhered to for six years in their trading journey. This strategy involves identifying and capitalizing on market trends, whether they are upward, downward, or sideways. Following the big money and riding the waves in the market is the core principle of this approach.

New Trading Strategy (25 Delta)

The trader announces their shift to a 25 Delta strategy, which has led to a reduced win rate of approximately 71%. However, they now collect around 27 cents per trade, allowing them to risk only 23 cents. Despite the lower win rate, this strategy yields a substantial increase in expected return, nearing $1250 over a 100-trade period.

Risk and Drawdown

The trader acknowledges that the new strategy will result in more frequent losses, with potentially 15 to 18 consecutive losing trades. However, due to the larger credit collected per trade, the losses are mitigated, and the overall profitability remains higher.

Maintaining the Trend Following Aspect

While changing their credit spreads trading strategy, the trader emphasizes that they are retaining the trend-following aspect of their approach. They believe this strategy shift enhances profitability without altering their core trading philosophy.

Setting Up Credit Spreads – Entry Criteria

The trader provides a step-by-step guide to setting up credit spreads, including criteria for assessing market direction, determining strike prices, choosing expiration dates, and ensuring minimum credit collection. These rules form the foundation of their new strategy.

Three Rules and Setups for Profitable Trades

To summarize their new strategy’s essentials, the trader outlines three critical rules and setups for profitable trades. These rules encompass placing two trades per week, following specific criteria, and maintaining consistency in trading practices.

Conclusion

In conclusion, this trader’s decision to change their credit spreads trading strategy is driven by the pursuit of greater profitability. While the new strategy may result in more frequent losses, the increased credit collected per trade compensates for the higher risk. It’s essential to adapt and refine trading strategies to align with market conditions, and this trader’s journey serves as a valuable example of that principle.

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Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer