Quote:
Originally Posted by CandyKreep
Admittedly, understanding the EV implications of nearly any move I currently make in equities is going to be my biggest leak. Which is why I put off getting into it for so long and have been stubbornly trying to make something happen in FX.
No one really understands the EV of their decisions in the markets...This is also true in poker. What you have is a model of probability, a distribution (standard deviations are used a lot in options), etc. Then you also have a risk to reward ratio.
So just like in poker, you need to know (be able to estimate) your risk / reward and the probability of each. But, unlike in poker, you need to understand time, the environment is not static. Even though your stop wasn't hit, maybe you should exit bc of X. The crux of my theory depended on not(X), so now that X is true, I was wrong.
Further, if you are long or short premium, in other words, not theta neutral, you need to understand what happens to your position as time passes.
Same is true for IV and rates.
IV, expected move, average true range. These are all similar ideas. If the expected move in AAPL is $10 this week, its unreasonable to have a target of $230 if you went into the trade with an investment horizon of 4 hours.