How to Avoid Low Probability Conditions transcript

Over the years of trading properform accounts, I started to understand why failure rate is so high in this industry. Just look at this top step statistic from 2024, you can see that only 3.5% of traders get to the first payout and then only 0.1% of them get moved to live funded. And the reason for this is because everyone stresses about their strategy. They stress about psychology, emotions maybe, but no one talks about market regime.

No one talks about market conditions and how important that is to identify market conditions and also how to adopt your risk management because we understand that risk management especially when it comes to prop firm space it's the most important part ever. So picture this. You are on a run. You've been hitting winning days, winning weeks, and even got to pay out maybe. And you think that you figured out markets, right?

Your win rate is high. Your riskreward is healthy and everything goes smooth until it just stops working, right? So same setup, same execution, same you. Nothing about what you're doing changed, but the trades that we were printing a month ago are suddenly getting chopped up to pieces. And here's what most people do at that point. They start to blame themsel and that's that's in the best case scenario, right? Normally people blame price action, they blame presidents, they blame whatever universe, but not not market conditions, you know, not volatility, nothing nothing, you know, uh it should should be something something, you know, uh that has to do with politics, it has to do not with me, not with with the fact how I identify market regime, right? and they start tweaking their strategy, right?

And that's where mistake happens, right? So that's the biggest mistake that uh people do. They start to add indicators, maybe new new things, right? New shiny objects. Uh they start to overtrade, revenge trade, when most of the time the thing that changed wasn't them at all. It was the market regime. And it's crucial to understand market regimes. And the cheat card to read market regimes is to understand volatility. So this video is going to be about volatility and how to identify it.

I'm going to demonstrate you how I use different tools such as IV rank wix term structure to tweak my risk management and to adapt to each environment whatever month that is whatever day day or week. So the easiest way to model volatility is to look at the CBOE volatility index. Simply put, wicks. That's our very first step. That's the foundation of it all. And if I had to focus on one thing when it comes to volatility, I would focus on wicks and then gamma exposure.

But we're going to speak about this a little later. But now there is simply if you look at wicks and if you um draw these levels such for example 15, right? So if it's below 15, it's considered to be calm, right? So volatility is uh low can be summer price action can be also Christmas you know holidays whatever then uh you know generally speaking volatility is low then if it's in between of 15 25 like 30 you know even 25 because 25 this is where fear uh starts to kick in right so this is where I consider volatility to be expensive And this is like kind of this normal range, normal price action, you know, like Trump is tweeting and then some tariffs or whatever, you know, news.

So that's very very healthy. This is where you can uh hold your runners. This is where I um you know, this is why I prefer to trail. And then if it's above 25, if it's above like even 30, that's considered to be very high, right? it's going to be very short-lived and uh you know unless it's a black swan event such as for example CO um you know back in 2020 we've seen wicks holding above 30 even above 40 45 right so that's the easiest way you go on your chart on your terminal whatever you use trading view and then uh you can simply take a look at the beginning of the session okay wix is around 20 perfect it's healthy healthy market I can hold runners, I can trail my stops.

Okay, if it's below, let's say 15, you should be, you know, maybe a little, you know, not not as greedy with your takerits because markets simply are not going to be, you know, um, as explosive. They're simply not going to run uh if Wix is like 14 or 15 like, you know, it's been lately. This whole month, August 2026, Wix was around 15 16. Hence why we never saw any major continuation moves, right? You know, um we've had maybe like two or three days, but those are um either tweets or um some, you know, economical event or whatever, you know, and wicks stayed the same, right?

So, it never reclaimed 16. But the part that no one talks about is the gamma exposure on Wix. This is where we combine what we know from options law from my previous videos and we combine this with volatility. But what if I told you there is a way to model volatility and even know where markets are going to go direction even on equities not only wicks right by looking at gamma exposure on wicks right so we know that positive gamma nodes positive gamma exposure acts as support and resistance and sometimes even acts as a magnet right so what if I told you you can look at wicks you can see that for example this this level of positive gamma exposure we can see at 16 uh on this table from option step and here are the charts.

So this is how this level played out. You can see that wix was respecting this level probably for five sessions straight. Right? So that is a very very very strong level of this positive gamma exposure. And here on the right side, this is a screenshot from S&P, right? So that's around the same um level of 7,400, right? And we can see that these guys that are going to disorrelate, meaning that if Wix is going to go down, indexes, equities, you know, whatever tech is going to go up.

And this works the best. If you look at S&P specifically, this this correlation between WIS and S&P between this main index of S&P 500. So this is a beautiful example of how it works. Of course, it's going to depend on VANA and we are going to talk about this a little later, but for now, you need to understand that positive gamma exposure, these levels, they're going to hold on wicks. It's not it's not only going to work on equities, you know, or on QQQ, NDX, S, SPX, whatever asset you trade.

It also going to work on WIS. And this is my favorite way to model Visi as I already said. Next one is less advanced but as important as so-called IV rank, right? So say a stock's implied volatility is 30%. Is this high? Do you consider it to be high? Well, you can't uh really answer that because 30% is nothing for small biotech stocks and it's huge for S&P, right? So the absolute number is basically useless on its own.

IV rank fixes that. All it does is compare the current IV to that same assets own range over the past year over the past 365 days on a scale of one to 100 sorry 0 to 100. So if it's sat between 20 and 60 all year and you are at 40 that's a rank about 50 right which is considered to be pretty expensive right middle of this range. So why do we care? Well, it shows us whether volatility is expensive or is it cheap, whether it's high or low, right?

So, if volatility is high, well, there here's your answer, right? So, you understand. Okay, perfect. Maybe um you know, it's worth for me if I combine it with negative gamma on S&P or whatever equity you trade. Maybe if I combine it with this high IV rank for today, um I'm going to focus on continuation trades. And vice versa if IV rank is low, right? So let's say for Q is around 10, 15, 20%. I understand, okay, maybe today I have to focus on uh those smaller base hits.

I'm not going to hold runners. I'm not going to trail my stops. Maybe I'm going to trail my stops, but I'm going to do this aggressively because I understand every uh point, every point of interest can be reversal point. So the Wix tells you the mood of the whole market and IV rank tells you on a specific name you're looking at whether you are actually being paid enough to sell or gain a deal to buy, right? So it's also very very useful if you trade individual stocks, right?

Because you need to understand implied volatility if you trade options, right? But we trade futures so we only look at QQQ, maybe SPX, that's the best. Now we get into the shape of volatility which is where it gets interesting because volatility isn't just a number you know it's not only wicks you know you cannot say well is low okay market regime is uh going to be uh low probability for us I can't trade right it's a little bit uh more complex than that so volatility is going to change depending on which expiration and which strike you look at so First of all across time different expirations let's say if you take implied volatility at different expirations a week out month and three month and you plot it normally that line slopes up right so neartterm volatility is lower than longer dated volatility because there's just more uncertainty the further out you go the upward slope is called contango and it's what a calm healthy market looks like.

Okay, so if you look at this chart right here, it shows you contango and backwardation. When stress hits that curve is going to flip and this is so-called backwardation, everybody scramles for immediate protection. That's the mechanism behind it. So nearterm volatility spikes above the longer dated stuff and the curve inverts, right? The easy way to watch this without any tools, you know, you don't have to have like term structure.

You can just go and look at trading view. You can look at Wix 3 month, right? So, you compare Wix with Wix 3 month. It's 30-day volatility versus three month volatility. When Wix is below Wix 3M, you are in contango. That's normal state. But when Wix pushes above Wix 3M, it's flipped into backwardation and that's your stress signal. Right? So you want to compare these. You want to look at different signals here, different tools, right?

And when a panic market starts sliding into contango, that's usually designed the worst of a trading odd. Then there's the other axis across different strikes. So-called volatility smile. If you plot IV for different strikes at the same expiration, it's not flat. It's a curve. In indexes, downside puts carry higher IV than upside calls because the market crashes down, not up. You know, always market crash, right? Everyone talks about market crash and um no one talks about markets go up and up and up and up and up.

No, it's it's normal for us, right? So, a bit of this downside protection is absolutely normal. So, it's it's absolutely healthy. What you watch is the change of it, right? So, when the put side steepens, downside protection getting way more expansive relative to calls. That's fear building and it often happens quietly while price still looks fine. So now we coming to the most advanced one of them all is so-called volatility surface.

It's 3D and you know um it sounds intimidating but it really is not. So let me just make it simple for you. We just looked at volatility two ways across time and across strikes. The surface is just both of those at the same time. So strike on one axis, expiration on the other axis, and the implied volatility is the height. So that's it, right? It's just a 3D chart and every single thing we talked about wicks and term structure skew.

It's just a flat slice to this one object, right? So that's, you know, um most advanced way to look at volatility and you read it by shape. It's not that hard, you know, it's not that complicated. A smooth gently sloping surface is a calm normal market right when it gets distorted the nearterm edge lifting up the downside corner spiking and that means that market uh is just you know this fear state and you are seeing stress across time and across strikes in one picture instead of flipping between charts.

So basically like combining those two like volatility smile and term structure and all of this is needed for us to understand volatility because it's the foundation of a market regime right so we have different presidents we have different market events right macro events let's say wars whatever all of it is going to be represented on this volatility surface it's going to show up on wicks right? It's going to show up on term structure and if you know how to read these tools and if you know how to adapt yourself, adapt your strategy and most importantly adopt your risk management because I think that's the only uh part of strategy that you can tweak because you don't have to tweak your whole uh edge the way you enter you know uh the way you analyze markets you only want to tweak your risk management and this is what we're going to talk about.

So knowing the regime does nothing if you don't change how you trade in it. And um it's going to be the same thing for you, right? You're going to have those winning streaks if for state you're on top of the world and then all of a sudden you blow up, you blow your accounts, blah blah blah. You have those costs um which you can write off, but who wants that? We want the highest ROI possible, right? So the core idea behind risk management is very simple.

So your position size should move opposite to volatility. So higher volatility means smaller size let's say higher volatility you drop down to micros and then lower volatility you can carry more because a normal size position in the 15 weeks and the same position in a 30 weeks is you know completely different amounts of of uh risk right and we know that let's say when wix is 30 35 we can see 50 100 points candled you know on on ENQ, right?

So, you need to understand that most people's size the same regardless. Just keep the risk consistent. Two minutes. Okay, perfect. Let's go. And I risk two minutes during August price action. I risk two minutes uh during cover does not matter. And then they wonder why one bad week wipes out a month worth of progress. So concretely when Wix is low under 15 or like under 16 this is where you want to tweak your position size and here are two factors.

First factor is that you normally need to size up but if everything else let's say IV rank then uh volatility smile then term structure then you look at weeks three month right if volatility is genuinely low this is where you need to tweak your targets as well because you know if you expect markets to run four five 10R are during uh low volatility times then you're going to lose right so maybe during this time you need to adjust your targets you need to adjust your risk management so you see like it's not only about stop-loss right so how much you get stopped on this trade it's also about how much you how much money you make from this trade right so so here's an example let's say we are back in April 2025 volatility is very high.

Wix is around 35. I rank is expensive. You know, let's say onq it's probably 75 80 90%. Right? And you need to understand okay well my position size needs to be adjusted. Uh so it needs to go as low as let's say five micros or like three micros, two micros, whatever whatever works for you. And then my targets, you know, I maybe maybe I can take bigger targets right now because markets going to run. Okay. And vice versa.

If Wix is low, let's say August 2026, Wicks spend this whole month around 15 around 16. Well, I understand, okay, maybe I should risk 2 millions now. Maybe I should risk 1 million now. But maybe I should focus on base hits. This is the reason why you see me taking those base hits this whole August because I could not take a single runner. I maybe took like whatever two runners this whole month. We've had 20 trading days and I took only two runners, right?

Everything else are base hits. So I either want to get stopped real quick or I want to get my profit 1.5 2R whatever I'm done for the day right so let's bring it all together wix gives you the overall level and mid 20s 25 you know 30 even this is where things start uh getting serious gamma positioning tells you whether volatility is about to stay pinned or expand this is when you look at right so we all know about positive and gam negative gamma exposure.

This is where you want to pay attention as well, right? And gamma exposure on wicks. This helps you to model volatility. Then IV rank tells you if options are cheap or rich on a specific name. So since we analyze skq, since we analyze S&P, you want to look at those indexes only. So term structure and skew tell you whether fears building and where and the surface is all of it in one view. So your risk management, your size and your stops should shift with all of it and it takes time.

That's the biggest skill that trader can have. But trust me that's the most important part because they all they say that risk management is the most important part. You know risk management is the king. But no one tells you how to tweak your risk management. What the hell does this mean, risk management? Okay, perfect. I'm ready. But tell me how. Well, in this video, we just went over how. So, you have two choices. You either adopt to the new market regime or you stay in this place where you uh have this great run and then you blow it all up.

Right? So you never want to be this trader who just you know running the same playbook into different regime and not adjusting. Once you can actually see the regime, that whole cycle mostly goes