How Can A Losing Tactic Make You Money?
Successful traders use setups with a positive return expectance. But having a winner setup many times isn't enough, since other aspects must be considered in order to make money consistently over time. The management of risk, tax, and volatility over the entire portfólio of strategies is very important for a professional trader. A losing tactic can help a trader to optimize his set of strategies and make more money by doing this.
Losing Tactic For Reduction Of Volatility
Traders use leverage in order to potentialize the financial return on their strategies. But leverage can have a negative effect on the total trader's returns if these returns are too volatile. It means that leverage must be used sparingly.
If the volatility of the trader's returns is low, there will be space to increase the leverage and also increase the financial return as consequence. With that in mind, a trader may find it advantageous to use a losing tactic with a low or a negative correlation with his general returns in order to reduce the volatility of his results. This is right if the effect of volatility reduction is more significant than the systematic losses of the losing tactic.
Losing Tactic For Tax Efficiency
Taxation is a complex matter because it depends on many things like the type of asset traded, the type of trade, the purpose of the trade, the type of trader, the country the trader is from, the place the trader lives, the market the trader is trading and etc. This complexity makes room for optimization and consequent reduction of the tax to be paid. For example, if the tax rate for day trade is greater than the tax rate for swing trade, a trading system can be made aiming to transform gains from daytrade operations into swing trade gains. Seen in isolation, this tactic may have negative expectance in the operating results due to transaction costs, but the reduction in tax can compensate for it, increasing the trader’s net return.
Losing Tactic For Risk Management
The concept here is straight forward. It’s just like buying insurance. The money is going away all the time with the insurance payments, but if these payments are smaller than the financial returns on business activity, it might be interesting to pay more insurance and escalate this business. The same idea is valid for trading systems. Sometimes having a losing tactic like insurance can allow a trader to increase the leverage over his profitable strategies and increase his general profit.
