Antifragile Trading Strategies

Antifragile Trading Strategies

The term Antifragile was coined by author Nassim Nicholas Taleb who was also a professional option trader and former hedge fund manager. Taleb created the word ‘anti-fragility’ because the existing words used to describe the opposite of fragility, such as unbreakable and robustness, were not accurate in what he was trying to describe. Antifragile goes beyond these concepts; it means something doesn’t only survive a shock, but benefits from an outlying Black Swan event.

In one example Antifragile trading strategies can be described as a system or process in the markets that grows more profitable from outlier events, fat tails outside the normal probability distribution, or parabolic trends in either direction that can create big wins instead of ruin.  

The Antifragile Trading system uses small position sizes and/or stop losses to shift the risk of big losses to the trader on the other side of the trade. The methodology of an antifragile system is to bet small for the chance of big wins. Long options and futures contracts are two of the best tools for asymmetric risk in favor of big wins or small losses when positions are kept managed correctly. These types of systems are not concerned with a large winning percentage but having huge wins when right to create profitability. 

One of the favorite positions of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control a large amount value of the underlying assets. While they expire worthless the majority of the time, when a trend emerges or a random Black Swan event hits the market the price of the contract can grow by thousands of percent and pay for all the small losses with one huge win. 

Nassim Nicholas Taleb the father of the concept traded long option strangles, betting on both directions to capture a huge trend up or down or a single Black Swan event. Any surprise market moving event was a huge profitable trade for Taleb. The key is in risk management through position sizing with small trades in comparison to total account equity. Small losses or huge wins was what makes antifragile systems profitable.

Trend followers are another group of traders that are antifragile in their process. There favorite tool for asymmetric risk in their favor is long futures contracts. They diversify, position size small per trade, and when they find their self on the right side of a big out sized move they let their winner run. While other traders have trouble dealing with volatility or unexpected trends they profit from them. Trend followers are usually the ones that make the fortune that other funds blowing up are losing like LTCM or Barings Bank. Trend followers made fortunes in 2008 as fragile companies, investors, and many funds were ruined. They systematically use diversified futures contracts across many markets to ride a trend until the end when it bends. 

The anti-fragile trader wins in trending and most volatile market environments along with random Black Swan events that are all far outside the expected bell curve of normal historical price action distribution. Taleb himself made a fortune in the Black Monday crash of 1987, and many other instances over the past 25 years. Trend followers have also been on the right side of huge market trends in the past 40 years building fortunes for their self and funds. 

Antifragile Trading Strategies
Antifragile by Nassim Nicholas Taleb