Mastering Trading Strategies: ORB vs EMA - Financial Engineering Podcast With Mark Anderson Multi Strat Mark

Intro OK, everyone, we're back with Connor and Jordy. There's been a lot of input that we want to Connor Boot Camp. So we are frankly putting Connor and Jordy on the spot to try their first round of education with me helping them out. So this one is actually going to be a little more conceptual because just from working with Connor and Jordy, I feel like they're pretty good at back testing and kind of understanding how to automate a trade to make money. But they may be lacking a little bit in the concept of why these trades work and what exactly that looks like. So the first thing I kind of wanted to introduce is we'll go back to last week and we had the opening range breakout and then we'll kind of compare that to an exponential moving average or an EMA trade. Opening Range Breakout vs. EMA So just for a broad overview opening ring breakout, we're setting a range. It's going to break out through the top or the bottom. We'll take it. An EMA or exponential moving average crossover will basically be there's, you know, undulating prices of two, you know, time frames. And then when one crosses over the other or below the other, that would be the signal for breaking train. So basically you could say 1 is trend following or, and, or momentum and the other one is a channel breakout and or momentum. So to kind of start with that, I'll kind of open it up to Connor slash Jordy. And if you want to kind of describe what the opening range breakout is, what's your understanding of it and then what an EMA is and kind of your understanding of the differences between the two. One thing I think it's good to highlight, it's kind of like we'll talk about why the opening range breakout and or EMA is good as a single trade, where it kind of sucks as a single trade and then where it has something to be aware of. And then we'll also talk about each of them in a portfolio. What's good about it, what kind of sucks about it? And then what's something to be aware of. And feel free to tag me in if you have any questions. But I guess we'll kind of start with Connor and then Jordy. Feel free to interject or you can like popcorn. Jordy, Connor, if you have any questions or myself. Speaker 2 Yeah, I kind of just start out with like my basic understanding of it, I'll pop and I'll let kind of Jordy take a little bit over it too as well. Just from my study on it, the opening range breakout is like a good one trade and then the AMA is a good multiple trades throughout the day. So with the opening range breakout, for instance, the reason why I said it is because it's 1 price action. Like say if you have your high, high price action, then that's when you can do your open range breakout from that 11:30 to 3:00 PM time slot, whatever your time parameters are. And then the EMA is like we have a 520 MA and then like a 920 may basically when those are start crossing over, that'll let you know when you need to sell it or when you need to buy it. So like you said, Mark, it's a trend falling, you're just following that trend all day long. And whether if it's going under or if it's going over, that's when you know you need to sell it or buy it. So that's just kind of my basic understanding of it. And really they, what I've seen of just like how you can add it into your portfolio, like the orbs are like just really good to have as just occurrences in your portfolio just because you, you have ability to really just collect premium on one trade. You can win big on that one trade. And then e-mail is something you can kind of apply to all of your trades because it's just like I said, it's just letting you know when you can buy or you can sell it. So it's something that you can kind of apply to a lot, a multiple. Speaker 1 Yeah. And then do you have anything outside of that Geordie kind of your understandings on it? Speaker 3 Yeah, no, I mean that the only thing is that in theory or it doesn't mean could not get triggered, right. So it's not even a a for sure trade whereas you know in terms of our currencies as Connor was saying trend following you could open one every minute, right. So in that in that metric. Speaker 1 Connor, did we learn something from what you already just said? Maybe that was what you were talking about. Speaker 2 So basically saying with the EMA you can run it every minute. And is that what you're, is that what you're talking about? Speaker 1 Yeah. So like a better way to think of it is if we're running an orb trade, let's say, OK, first hour we're we're taking the price action, let's say it's between 6000 and 5900. So if the market never goes above 6000 or never goes below 5900, there's no trade. So no occurrence buying some, getting their idle, whereas with an EMA you're either above the 20 minute or below the 20 minute. So like theoretically that trade is always available. So to go like a little more depth into that is obviously and orb is a stronger signal, but you can't create that signal as much because on the worst like ping pong up and down days, orb stays out. And on the biggest ping pong up and down days, you just get murdered on EMA. And on the biggest trend days, you're going to do great on both, but you only get one occurrence on the orb. So so. Speaker 2 You're basically losing out on compounding premium and just calm this compounding money as well on the orb where as you can collect a lot more of that on the e-mail get more occurrences, right. Speaker 1 Yeah, and all even kind of relate this to business. So like we can kind of look at it in like the banking industry. So like the banking industry score thesis behind basically making money is that they're collecting risk free interest off of your money and then they're loaning it out and basically doubling that down. So I was just talking to Geordie about this. It's like there's a reason that when you run payroll, the funds are locked up for two days when they go from your bank account to your employees bank account. That's not because it takes two days to transfer money. It's because the payroll provider in the bank wants to collect interest on it for two days, which over, you know, billions and billions of dollars ends up being a lot of money and it's risk free. So like this is the concept of there's basically the robustness of our signal, which is like how lucrative it is from an expected value perspective. And there is like the overall pool of it. So we can kind of think of this as like there's premium capture, which is our ability to keep the amount of premium that we sell. And then there's premium pool, which is like our aggregate ability to sell as much premium as humanly possible. Whereas the more premium we can sell and control our risk, basically the more money we can make and the faster it can pass. Speaker 2 So makes sense I. The Core 4 of Option Trading Kind of like to bring this up as I introduced this concept of like the Core 4 in one of my last videos, it's actually from Alex her Mosey in like a sales funnel, but I thought I could kind of change it to option trading in the concepts of it. So basically in this Core 4 is there's going to be risk premium, which is kind of like edge per SE. So like trend following is a type of risk premium, which is kind of what we're talking, talking about a channel breakout as a type of risk premium because you know, you're you're breaking from the mean of the price. And then also like just having a return profile where we're selling an option. We have basically, you know, a much larger downside than an upside that also holds risk premium. Then there's basically the accuracy of our price. So we could think of accuracy of price of like is it liquid? Does it settle the cash that obviously happens with SPX. Like are there clear defined rules around what we're doing and do they make sense? So like using an accuracy of price for a signal that the market is up .2%, well, .2% is, you know, half of the expected move in a low VIX and it's like 110th of the expected moves in high VIX. So like that's probably not going to give us a good accuracy price. And you can also look at the rules for that entry. Then there's basically the frequency of those occurrences. So this is kind of what I was just talking about with the difference between Emas and OR BS. And then the last one would be like our ability to offset drawing. So how else this would fit in is an ORB, even though it's great and you can make a lot of money with it, if we go on a losing streak of like 5 consecutive days, since we may not be able to trigger it everyday, our ability to offset that draw down, even from a numbers perspective, if it may be like, you know, it doesn't hurt or sharp that much, it could take a month and a half to get out of that hole because it doesn't trigger. So thinking of that Core 4, I would like, you know, you guys can raise your hand and, and choose one of them, but I would like whichever 1 you feel confident with most. Connor, you can start with that and then Jordy will basically take the next one of what he feels confident most. And if you could describe both of those trades and how they fit in one section of the core 4. And then if you get stuck or have any questions, we can kind of like talk through it to make sure you get the concept. Speaker 2 Yeah, that makes perfect sense. I was just going to say really just piggybacking off of what you were just saying there, Mark. That makes plenty of sense to me. Like I, I did just have one question before I moved on to that though, because this is more of like an applicable question of just understanding like the I guess more of how often do you, does that orb, do you, when you trade it live? How often does Orb get signaled? Like how often is that usually getting signaled? Is that like a two to three times a week or is that, you know, I know it's different every day, but like how often do you see it in your portfolio? Yeah, essentially being pretty bad. Speaker 1 I have to, yeah, let me pull it up real quick. But like from my understanding like off the top of my head, it roughly triggers 1 signal a day. So some days. Speaker 3 That like almost 90, it was over 90% of the times, but I think the trigger The thing is. Speaker 1 Once a day yeah some days that's going to be both sides. So like you'll get a big reversal. So like the other thing that kind of sucks is like on the worst days of EMA on orb, you're probably taking both sides and you can potentially get smoked on both sides. So like it ends up being about 1 trade a day, but I think it only, it only executes about 70% of days because some days you get you'll, you'll end up triggering both sides. Whereas with an EMA it's 100% of days. Like unless you turn it off, it's gonna, it's gonna be above or below that it's one or the other, you know? Speaker 2 Yeah. I would just go in and kind of tie that into #4 of just like of the core four of the offsets, the drawdowns and Ridge lines. Speaker 1 Yeah. Speaker 2 Yeah, because that's why I'm like looking at both of those trades where the EMA is like, I feel like now, I haven't really played around with the EMA and the options of Mega a lot, but I just watched a lot of people run it with candles and how they're just manually inputting it and not necessarily doing it automated. And I just feel like there was a lot there's a quicker in and out train that you could kind of play with it because you see, you see, all right, it's hitting this trend, right? Let's buy it here and then let's try to you can just kind of add your add your profit, I mean add your stop loss and then add your profit take up there. And then you can kind of just get in and out of that. Rather with the RB, like you said, I could see there being a lot more risk with that. Like you were saying earlier, where we've seen that a lot with a lot of the trades that we've tested in our portfolio where they seem like really good trades and options Omega. But then you go and, yeah, trade stir and you start seeing some fat losses really quick and you're like, man, like our should should we just I know the history is here and I know that it looks really good in options Omega, but like, I'm really just wanted to turn this this trigger off and just put something else there. So that's where I like I think about both of these trades. Yeah, like one I'd feel more comfortable running. Speaker 1 So to kind of describe it then, which individual trade do you think has a better ability to offset draw downs in the long term and why? And then why does the other one not have the ability to offset draw downs over time? And when I talk about ability to offset draw downs, I mean like length of the draw down, like pain of the draw down. So like if you're using a big stop loss out of pain in the draw down and then also just like degree of, you know, how big that draw down could potentially be on a single day. Speaker 2 Yeah, I mean, again, this is theory, right? I haven't played with a lot of Emas like in Options Omega, but I'm just talking with the theory we. Speaker 1 Can base it on the numbers a little bit like I like our numbers are always going to be our hint, but this is more understanding the why behind all those numbers. Speaker 2 I'm thinking that I would feel less risky with the Emas because I could kind of set it up in options Omega a little bit better with just doing basic trades with it and just like not putting a lot of not size in it really large at all. I mean, you could make the same argument pro RB, but I was just saying from my perspective, since there's so many a day, I feel like I could just size it down, make it very miniscule and just get my win. If I lose, I can have a bunch of little wins get back up. And if I lose a lot, I'm not so deep in the hole that I could have one good day and bring me right back to where I was to break you. Speaker 1 Sweet. And then, Jordy, would you agree with that, that Emas has a better ability to offset drawdowns than an orb or do you disagree with that? Speaker 3 I, I well, it depends also on how you set the stop losses. I mean it's it's like yeah, how you set the settings. But in theory, yes I agree 100%. And the whole point of 0 DDE is repetition. So hey, let's compound. We couldn't do it like before 2022, so let's compound even daily even more so. I love the concept of EME EMA that you can just like go as as long as your portfolio, your you know, where your risk appetite, your leverage capabilities as opposed to orb that yes, I mean, you know, as you said, if you have like a bad strike, then you just like you're you're dead for weeks even. Speaker 1 Yeah, and I agree with that as well. So Connor passed and got it right with fine colors. So now popcorn Geordie, which one are you taking the other Core 4? Core 4 vs Orb And can you describe which one's stronger slash weaker DMA of the orb in that aspect? Speaker 3 Well, so we've done frequency, we've done offset draw downs, right? Speaker 1 Yeah, you haven't done frequency yet. So the only one Connor took was ability to offset draw it. So we have frequency, we have risk premium and or edge and then we also have what's the other one of the. Speaker 3 Core 4 Accuracy. Speaker 1 Accuracy of price, yes. Speaker 3 Yeah, I would say, let's see. I mean I would like to take frequency, but let's go to ask something that I feel less confident about accuracy of price. I think that either or did make no difference because you're playing the same instrument. You're it's equally liquid. You're most of I mean you're not that far out of the money that would justify that they're both you're you're doing credit spreads at the same. So I would say that accuracy of price, logically, I would say that they're at the same level. Maybe you're gonna correct me now. Speaker 1 But Hunter, do you agree? Speaker 2 I mean, yeah, he brought me a whole another perspective of that, but I think that makes perfect sense, honestly, from what he was saying. Speaker 1 So again, I'll agree with that. I'm actually kind of impressed you guys got this off the bat. The one thing I will say with this is in terms of accuracy to price. So like generally of the core 4, three things are almost independent, the risk premium, the accuracy, the price and the ability to offset draw downs. And then the frequency is kind of going to be the tiebreaker or ties that together. So the fact that we can have much more frequency and then the data is always a put or a call instead of with the channel breakout, basically an orb of no trade or a putter or call. So like I agree with the frequency. You're completely right, Jordy. However, I mean with accuracy of price. However, when we look at the frequency, that's kind of like the glue that will make the rest of the Core 4 go together and the fact that there's never a null signal. We're taking something I just have more confident in the data of the EMA more on. However, like I'm sure if we looked, if we started to bring in risk premium, the premium captures a little bit better on ORB, so like that can bounce out also. But that's the other concept where it's like the three variables are basically independent and the frequency is going to be the glue that basically holds all those together. We almost think of it as a foundation of the Core 4. Like if you were solving A Rubik's Cube, that's like the full row of everything's red or everything's blue where you can start to work off of it. So the last one is going to be risk premium. Risk premium I can describe this if neither of you guys feel confident, but considering you haven't gotten anything wrong yet, I'd like to see you guys squirm. So if one of you would like to raise your hand and volunteer to talk to that one. Speaker 3 You'll go, Gunner. You'll go. You'll go. That's here. Speaker 2 I'm not. I'm not. Speaker 1 Afraid of you? First, explain to me the concept of risk premium so we make sure we're on the same page before we start speaking about maybe something that we're not on the same page about. Speaker 2 I might see. I'm just taking a wild guess on the risk premium on just understanding that like, right, is this like a risk reward? Is that where you're kind of thinking about like how much premium that you're going to be able to collect versus the drawdown that you're going to be facing with? Yeah. Speaker 1 So let's go back to concepts. So like I usually like to relate to things people do. So like I think we can all relate to this except for Jory because he's in Europe and his health care is free America. We pay premiums and the private market determines how much we. Speaker 3 Pay our own United Health, so it's OK. Speaker 1 Thank you guys. Speaker 3 Thank you. Speaker 1 So Connor also sells PO if anyone has insurance needs for a small business in the Southeast region, please like Connor now, So with this is when so like when you're signing up for an HMO Connor, which for people that don't know about this, you can actually correct me if I'm wrong, but basically it's like you're just paying a co-pay and then it's non like superlised collateral insurance. And they're just saying, Hey, you know, you don't use it very much when you're young and when you're old, it basically evens out. So like the young people are paying for the old people. And then in the in APEO model, you'll get together with a bunch of people and you'll go to the free market and say, Hey, this is your quote. If people don't get sick, they won't increase the rates that much. There's no such thing as them decreasing your rates. They only increase them. And then if you know, maybe you're, you run a wood shop and too many people got hurt that year, they're going to increase whatever that premium is. So like, it's all like it. It's less advantageous for a business to go take the risk of their rates going up if they potentially cannot afford that. So like you want to take risk that you can withstand the losing from basically and people that basically don't have the ability to offset that risk will compensate more people for it. So you can essentially say like when we do an HMO it that's just like owning the S&P. Whereas when we go and take risk premium, that's like saying, hey, we're trying to get a lower healthcare rate and or we're trying to beat the market by taking on some of this risk that other people in the marketplace don't have the ability to take on. So knowing that about risk premium, does that kind of make sense? Yeah, we. Speaker 2 Really appreciate you explaining it that way. I feel like you need to sell PEO honestly. I mean, yeah. Speaker 1 A little stretch for that example, but the main thing was to get Connor to get it. I know for you Europeans that makes no sense out there. I mean then. Speaker 2 I would definitely say if like now my one question would be so risk premium basically is like saying I want to take it. Speaker 1 Yeah, and it'll also give you a hint too. So it's like generally the higher the PCR is, the higher. Speaker 3 What's the same is it has to be. Speaker 2 It. Speaker 3 Has to be. Yeah, right. Speaker 2 So that makes sense. Yeah, I would just say kind of relating back to my. Previous answer, I would say ORB would definitely fit my risk premium profile then because I I would build My Portfolio around like base hit trades and I'd be like, all right, here's my Vander trade for today. Here's the trade. I'm going to try to go out and collect all my PCR. Speaker 1 And why do you think it has more risk premium orb? And you can kind of think of the other Core 4. So this again, they kind of feed into one another, but like you're never really going to find one that fits all four. If you do, yeah, trip for science, I will hire you. You know what I'm saying? Speaker 2 No, I would say it fits, it fits the profile because I could just put high only and on the orb and just want to go, you know, just to try to collect as much premium as possible. I know I technically could do that with the e-mail just the way you're, you're following the trend. But like, I just think with the the way that you filter out and build an option of maybe you could really just think about how much premium could I capture in this and up the contracts and size it to where you're just literally just taking all the risks that you want. And at a pretty minimal drawdown too. Because like you said, it's not going to strike multiple times throughout the day. So it could, you could have really good days. Obviously you could have really bad days with that as well. But like you said, if we're just thinking about risk premium and taking risk, I would love that set up. Speaker 1 And then do you agree with that Geordie, or is there anything you'd like to add to it? Speaker 3 Well, I, I agree with most of it, but then you I mean that you can just be one that the trade huge trade. It depends on how much rate you want. The PCR is a percentage. It doesn't mean that you're gonna take a lot of credit. I don't know if I understood correctly Connor's point, but. Speaker 1 Yeah. So kind of what I would say that I think we need to grasp a little more. So it's like I think what Connor was trying to say is like, since it's a more robust signal, like it has a higher PCR, we can afford to like basically go closer to the money, you know what I'm saying? So like if you trade an at the money auction or like Connor even showed a few when we went long or be like it's just a stronger signal. However, with EMA, if we're like at the money, we're just going to get killed almost all days because we're always putting one on. But the other thing I would say this too is like, I think another reason why asthma risk premium is because since it's based on the beginning of the day, we're much less certain what's going on. You know, Trump could say something for the rest of the day. We don't know what the market data will be. The trend has not really been established. We're trying to predict the trend instead of retroactively kind of following the trend. The other thing too is like since it's earlier in the day, you know, it's more capital efficient, but since it's more capital efficient, that also like leads to potential larger drawdown risk like we talked about it. And in regards to that, since there's only one entry a day, like if you're wrong, you're out for a day, maybe 2, maybe 3, whereas EMA you can take the next minute trade basically. So the markets most likely going to want to compensate you more of that because like even though you still may have a three sharp, if you take a drawdown, it's probably going to take three weeks to get out of instead of three days, which is obviously less appealing to most of the populace. And you can't really get the diversification multiple signals. So you would have to size it larger to make the same amount of money. So like that's a little more nuanced way to look at it, but kind of what I just wanted to show you guys is how using this really simple framework and then like backstopping into some numbers, we can understand what it looks like and kind of some concepts to put numbers on these two. It's like risk premium is generally PCR, ability to offset draw downs is generally our MAR ratio. Our frequency is generally just going to be like total premium sold. Like if it has a low PCR, it's going to have to have a really high MAR. You know, if it's very frequent, if it's not frequent, it's most likely going to have a high PCR and a small MAR. And then the accuracy of price is just going to be kind of ties into the frequency where it's like is this signal always on? Like if it is it one or the other or is it waiting for that perfect Goldilocks set up? So finally does. Speaker 3 Something. And what about win rate? Which one would win rate be linked to? Speaker 1 So win rates going to pair with basically PCRMR. So like if you have a low win rate, you're generally going to have a low lower premium capture. Speaker 3 Yeah. But in the terms of this framework, in the terms of this four that you just described, where would be win? Speaker 1 Rate win rates a little more balanced. So it's like if you have a trade that's trading every day like constantly like EMA, then it kind of goes into accuracy of price and frequency because you're like, I really trust what this number is. Whereas if you have an exceptionally high win rate like 99% in the trig trade only triggers like once every week, then obviously that's going to be a red flag to draw down. So kind of like the way to think of it is like your trade probably over filtered and has no frequency. If it has a high win rate, a high PCR and high mark and it's most likely not going to match or be accurate in the future. Whereas if your trade is constantly trading, it has a low PCR, it must have a high mark, and we probably have confidence in that. So that's a little more nuanced. Does that kind of make sense? Speaker 3 Yeah, because it's a function of two, I understand. So yeah, that's OK. Speaker 1 Yeah. It's kind of like think of Goldilocks, but OK, so to kind of close it up, if each of you could stay like one thing you learned from this that you had no idea what it was before, and then another thing that you had a decent understanding of and now you have a much better understanding of. What you learned from this We can kind of share those with each of you. You'd start on this one, Jordan. Speaker 3 So yeah, I really like the the something I learned about the offset drawdowns in terms of length and in terms of like the pain, how painful they are. I, I, I always think of maximum draw down in terms of percentage, but the fact that you also talk about length of it, that makes a lot of sense because when you're trading and when you see your trade steward every day and you're not like swimming above water, it drains your confidence. So that I never looked at it that way. But you know, draw down has these two dimension that I really like. So thank you for that. And something that the frequency like and also like, yeah, that was, that was a very good way like the strength of the signal versus the frequency, all these like perfect or imperfect balance that we have to navigate. That's something that, you know, like I, you have like re like reprogrammed into my brain, which is really good. Speaker 1 Yeah. Another thing we just popped in the head too is like, I think of another way people can relate to frequency is it's like think of frequency is like time with your partner, your girlfriend, your wife, your husband, you know, whatever that is where it's like you're a long distance relationship and it's much harder to connect to have a successful relationship when you don't have that frequency and exposure to it. If you're less likely to offset the drawdowns of a fight or any types of arguments, you're obviously taking more risk in what you're doing with your relationship. And then that kind of obviously holds basically everything in together with, you know, where you stand. So I think that's probably a better way to think of it rather than PEO and HMO also. And then, OK, so Connor, what what do you figure out from that one? Speaker 2 Honestly, I think it was just kind of a thing that you triggered when I didn't even think about or being getting triggered like it having the risk that it doesn't even get triggered or the risk kind of, and I'm not trying to steal Jordy's Thunder here, anything about that. But that was was alarming to me that like I didn't think about one, it doesn't get triggered and then 2:00. What if it doesn't get triggered one day and then you took a fat loss the day before? So just like understanding, just thinking about just because you look at I think my overall theme is just because a trade looks awesome and options Omega, you got to really understand the ports of support board testing it because you don't know how it's going to perform a lot. And I could definitely see myself kind of seeing dollar signs with that or Ord trade to be like, wow, this is this is a great trade. Let me launch it right off the bat. Let me select a couple contracts on that and then it going and like what the not fully understanding everything about it and not getting triggered in some days, like how bad that could really affect My Portfolio. So that was just the one thing that I took away is just like really making sure you understand your concepts before you go live with them. And yeah, I'm obviously good at that. Speaker 1 Sweet. And then do you guys have any more questions for me? Are you guys pretty set in regards to what that? Speaker 3 Well, on the other hand, Connor, I will add that losing money is a very good motivator to understand the trade. Like, you know, like always, Mark says, you know, if you want to learn something, trade the heck out of it. And I used to say, yeah, whatever. But now if I have something red, I you know, I don't wait when it's in the back test. I was like, yeah, just look at to it tomorrow when I'm losing money today, like I make sure I understand what you do that I'm going on. Speaker 1 So yeah, another thing that I forgot to mention is like, if you don't know what you're doing, you're gonna lose money way quicker with an EMA or something with high frequency. So like that's also something you need to realize too. It's like if you don't know what you're doing, if frequency actually could be the worst possible thing, you'll figure out quickly if you want to know what you're doing. But yeah, it could not be a good form though. But if you guys like this, we'll be brainstorming more ideas, starting to, you know, prepare a little more Connor core stuff going. But we kind of love to put Connor into the microscope and and do some beta testing and he's ready to educate people. So we will see you guys on the next one. Speaker 2 That was awesome. Speaker 1 That was a good one. That was a good one.