I’m about to share some statistics that I discovered through an unplanned credit spreads backtesting experiment. I started off by asking the question, “how often will one losing trade result in the next trade also being a loser for counter trend trading strategies.” After I figured that out, then I decided to figure out that statistic for every single strategy, not just counter trend trades. As always, let’s dig into the statistics!

These statistics are calculated and determined based on the strategies traded in the Inner Circle Membership and is based on the data for $SPY.

** Next Loss Percentage = Likelihood Of The Next Trade Being A Loser After Experiencing A Loss

The Squirrel Strategy

• Historical Win Rate Since 2005: 90%
• Number Of Losing Streaks: 20
• Next Loss Percentage: 35%
• Trade Rules: There is no clear indication that you should make a new exit rule for this strategy based on the next loss percentage.

The True Turtle Strategy

• Historical Win Rate Since 2005: 93%
• Number Of Losing Streaks: 28
• Next Loss Percentage: 29%
• Trade Rules: There is no clear indication that you should make a new exit rule for this strategy based on the next loss percentage.

The Short Play Strategy

• Historical Win Rate Since 2005: 95%
• Number Of Losing Streaks: 3
• Next Loss Percentage: 33%
• Trade Rules: There is no clear indication that you should make a new exit rule for this strategy based on the next loss percentage.

The Winning Whale Strategy

• Historical Win Rate Since 2005: 96%
• Number Of Losing Streaks: 2
• Next Loss Percentage: 50%
• Trade Rules: There may be an indication that you should make a new exit rule for this strategy based on the next loss percentage, but there isn’t enough trade history (only 2 losing streaks) to create a new rule.

The Elastic Bounce Strategy

• Historical Win Rate Since 2005: 95%
• Number Of Losing Streaks: 2
• Next Loss Percentage: 0%
• Trade Rules: There is a clear indication that you should never sell a trade early! There is close to a 100% chance that you will have a winning trade after experiencing a loss using this strategy.

The Elastic Rejection Strategy

• Historical Win Rate Since 2005: 91%
• Number Of Losing Streaks: 3
• Next Loss Percentage: 100%
• Trade Rules: There is a clear indication that we should make a new early exit rule where you close any open rejection strategy trades after you experience one loss. A loss meaning that your spread expires in the money.

New Credit Spreads Trading Rules?!

To summarize the data, there is no clear indicator that we should create an early exit rule for all strategies based on the data above. However, it is clear that there should be an early exit rule for the Elastic Rejection Strategy. I actually created three early exit rules for this strategy in my free credit spreads trading handbook.

The statistics found in this backtesting study align with the data we see in this dataset. This dataset shows the probably of X number of losers in a row based on win rate. However, the Rejection Strategy is fairly off from the theoretically level stated above primarily because it is a counter trend strategy.

If you want to learn about the original strategies, you can do that in my prior articles here. However, I wanted to create this article for Inner Circle Members to see the statistics and have a better understanding of what happens to the next trade after experiencing a loss.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer