Three weeks of trading NOPE

I’m three weeks into trading NOPE and here is what I’ve learn so far:

Your trader equation matters.

Imagine a game where you flip a coin. Heads you win, tails you lose.

You have no edge…At least in theory…But if the payoff is non-linear then you can win consistent money. If you win 3 x bet every time you win, and lose $1 x bet every time you lose. You have an expected value of (0.50 * 3) — (0.50 * 1) = $1 gained each time the coin is flipped. If you manage to make your bet big enough compared to your bankroll, you eventually hit a string of tails long enough to go broke, if you make it too small, you pay for it in a opportunity, time, or transaction cost.

Now, this has a lot of applications to trading obviously as it matches up quite nicely with the convexity of options pay-offs (or simply put options have a larger upside to a strong move, and they can be traded in a way to have a smaller downside).

Now 50% is really massively sub-optimal because despite the good pay-off:

If you could choose between rolling a weighted die, or flipping a coin, 100% of time you should grab the dice. Even if you have fewer opportunities to roll with the dice.

Every trade you choose to put your money on the line is making that decision.

Play around with this calculator to see why.

It shows shows all the paths possible:

Try:

1. Increasing win-rate
2. Then increase variance (this is basically taking more coins flips than waiting for dice)
3. Then decrease win-rate, and increase variance (ie. taking trades without an edge, and not cutting losses).

https://www.primedope.com/poker-variance-calculator/

So ideally, what you want to do:

1. Increase win-rate %
2. Decrease variance, because then you can bet larger, and decrease opportunity costs/transaction/time.

3. Cut losses, which improves the need to have a higher win-rate, and decreases variance.

So winning basically can be boiled down to a simple formula.

Maximize your wins, minimize your losses.

Make your trades with win-rates as high as you can make them.

Trade only on the loaded dice not the coin flip, if you can find the loaded dice (hint NOPE is a loaded dice).