Prudent Risk Management Is The Only True Edge In TRADING
- Thread starter Buy1Sell2
- Start date
Then you are a lucky gambler.
My gambling capacities in a casino are inferior to my"gambling" capacities in trading.
But what is the defintion of gambling? Because there the first misunderstanding can already appear.
I will not open that discussion again as it was already extensively done before.
That is why having an exploitable edge will increase your probability of being successful.
Prudent money management alone just increases the amount of time it takes the trader with the edge to aquire your money.
And why it vital we trade as the house..., and not a gambler
Many don't get what this actually means.., unfortunately - for them
RN
Poll: Is Prudent Risk Management the only true edge in trading?
Answer: No
Maybe if the question was phrased somewhat differently, I would've answered Yes. But it wasn't.
I'm not so sure I even agree it's an edge in itself. Because no risk management can force price to go in your favour in the expected way, there should be no expectations of profits from risk management alone.
Aside from that:
Risk management and, often unmentioned / too often forgotten, position sizing, are powerful tools for proper capital preservation. Doing these two right should protect against most damaging losses, long enough for having realistic chances to exploit incoming profit opportunities. In this way, winners are not really "expected" or in any way predicted, but a possible by-product of sound risk management by weeding out the painful losses.
It's a beautiful concept, but how can you say it's the only edge possible? Maybe it is for you, but so what?
As for having stop-loss at break-even or not, isn't such a hard rule a form of bias? Does the market care either way? Also, having stop-loss always beyond "noise" seem to enforce even more limiting assumptions. Imagining all the possible trading plans, having break-even SL might be defended with the argument that the time- (cost) and price- (risk) differences have at that point become equalized, or something entirely different, ie hedges or other combinations.
Managing risk and positions are crucial. How anyone does it is not as important as the possibility for consistent results though. If all you have is a hammer... and all that. Declarations of the One True Way (tm) to do anything, usually falls on deaf ears, and is often not the best medicine for curing intellectual laziness either. I do agree that sound risk management is very helpful and should be provided for dilligently for those who seek some security and possible consistency in their trading. As is often said, but it's also true: Trading should be boring. At least if the goal is along the lines of consistency.
Answer: No
Maybe if the question was phrased somewhat differently, I would've answered Yes. But it wasn't.
I'm not so sure I even agree it's an edge in itself. Because no risk management can force price to go in your favour in the expected way, there should be no expectations of profits from risk management alone.
Aside from that:
Risk management and, often unmentioned / too often forgotten, position sizing, are powerful tools for proper capital preservation. Doing these two right should protect against most damaging losses, long enough for having realistic chances to exploit incoming profit opportunities. In this way, winners are not really "expected" or in any way predicted, but a possible by-product of sound risk management by weeding out the painful losses.
It's a beautiful concept, but how can you say it's the only edge possible? Maybe it is for you, but so what?
As for having stop-loss at break-even or not, isn't such a hard rule a form of bias? Does the market care either way? Also, having stop-loss always beyond "noise" seem to enforce even more limiting assumptions. Imagining all the possible trading plans, having break-even SL might be defended with the argument that the time- (cost) and price- (risk) differences have at that point become equalized, or something entirely different, ie hedges or other combinations.
Managing risk and positions are crucial. How anyone does it is not as important as the possibility for consistent results though. If all you have is a hammer... and all that. Declarations of the One True Way (tm) to do anything, usually falls on deaf ears, and is often not the best medicine for curing intellectual laziness either. I do agree that sound risk management is very helpful and should be provided for dilligently for those who seek some security and possible consistency in their trading. As is often said, but it's also true: Trading should be boring. At least if the goal is along the lines of consistency.
Professional traders about reward-risk ratio
“You should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.” – Paul Tudor Jones
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros
“Frankly, I don’t see markets; I see risks, rewards, and money.” –Larry Hite
“It is essential to wait for trades with a good risk / reward ratio. Patience is a virtue for a trader.” –Alexander Elder
“Paul Tudor Jones [had a principle he used to use] called 5:1. […] he knows he’s going to be wrong [sometimes] so if he loses a dollar and has to spend another dollar, spending two to make five, he’s still up $3. He can be wrong four out of five times and still be in great shape.” –Anthony Robbins on Paul Tudor Jones
“The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.” – Marty Schwartz
Calculator
“You should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.” – Paul Tudor Jones
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros
“Frankly, I don’t see markets; I see risks, rewards, and money.” –Larry Hite
“It is essential to wait for trades with a good risk / reward ratio. Patience is a virtue for a trader.” –Alexander Elder
“Paul Tudor Jones [had a principle he used to use] called 5:1. […] he knows he’s going to be wrong [sometimes] so if he loses a dollar and has to spend another dollar, spending two to make five, he’s still up $3. He can be wrong four out of five times and still be in great shape.” –Anthony Robbins on Paul Tudor Jones
“The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.” – Marty Schwartz
Calculator
ET... begin asking yourselves the right questions to improve the answers you're getting.
Exclude trades requiring traditional risk management.
Build risk into consideration from the beginning and never think about it again.
I tend to view trading as a form of gambling. I have read any number of exchanges here at ET where one says it is and another says it is not. I think the barrier to agreement is failure to define the term. So long as the principle of an uncertain outcome is accepted as a characteristic of each and every trade, then trading is gambling. Someone here once made the point that not all gamblers are degenerates. There are pros who take a systematic or scientific approach to their games and they make bank consistently. To me, there seems to be little difference between the pro backgammon player, for example, and the pro trader. There also is little difference between the wild-eyed degenerate cashing in his IRA and heading to he track and the revenge trader trying to get back that $300 loss all at once and instead blowing out his $5K account.