The volatility of the instrument that you might trade has a past, present, and future – just like it’s price.
An often overlooked scenario for traders of all shapes and sizes is to establish a position based upon today’s vol, and never make an adjustment to the number of shares or contracts in managing the trade as the vol changes.
If you trade using “tiers” you are probably making this mistake.
We make our money overnight and over the weekend as you know, but we must adjust our positions up or down depending on the changes in the vol. It’s an inverse relationship, so if the vol pops after you’ve put on the initial trade, you need to cut your position size. If the vol drops, you can add to your position.
If you’re carrying 10 contracts, you might need to sell one and cut your size to nine if the volatility increases while you’re long. It might not seem like a big deal, but you’re cutting by 10%. Sell it at the market.
In the end, you’re trading your equity curve.
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