Prudent Risk Management Is The Only True Edge In TRADING

[syniczfx]

No one said you could. This is an indication that the thread has not been read nor the concept understood.

I think perhaps there might be difference between everybody's definition of what "Prudent Risk Management" is. Maybe that is where all the disagreement stems from?

I'd just had a quick skim through the thread so forgive me if im wrong. But i guess for most of the people that replied here, PRM to them means "deciding how much money to trade/invest/bet".

To do this, we may take reference to lots of factors such as what is the most we can lose if the trade fails, how confident we are in our trade ideas, how much this sum of money is relative to our total capital etc. Im pretty sure there are more reference points but I cant think of them right now. In general, the definition of the majority (forgive me for this assumption) is that PRM is simply a way to minimize losses in the event things go wrong (Thus the term "risk management"). While attempting to maintain as much exposure to the upside as possible. As this act is simply chasing two ends of a continuum. It is a balancing act which also depends on the individual's priority and risk appetite.
I would like to input my opinion that the addition of the word "Prudent" simply means to err more on the side of caution. So in that sense, the priority is more on minimizing losses.

Now I am unsure of your definition of PRM. But notice nowhere in my abovementioned definition of PRM did I mention IDENTIFYING winners or PREVENTING losses. As Risk Management is not in the business of finding trades. It is in the business of MANAGING the outcome of a winning/losing trade. Thus, it does not give traders an "edge" as it does not dictate how many winning/losing trades you have, merely how much you gain/lose from a winning/losing trade.

I hope that clears up the misunderstanding. And maybe you would like to share your definition of PRM!

 

[Buy1Sell2]

I think perhaps there might be difference between everybody's definition of what "Prudent Risk Management" is. Maybe that is where all the disagreement stems from?

I'd just had a quick skim through the thread so forgive me if im wrong. But i guess for most of the people that replied here, PRM to them means "deciding how much money to trade/invest/bet".

To do this, we may take reference to lots of factors such as what is the most we can lose if the trade fails, how confident we are in our trade ideas, how much this sum of money is relative to our total capital etc. Im pretty sure there are more reference points but I cant think of them right now. In general, the definition of the majority (forgive me for this assumption) is that PRM is simply a way to minimize losses in the event things go wrong (Thus the term "risk management"). While attempting to maintain as much exposure to the upside as possible. As this act is simply chasing two ends of a continuum. It is a balancing act which also depends on the individual's priority and risk appetite.
I would like to input my opinion that the addition of the word "Prudent" simply means to err more on the side of caution. So in that sense, the priority is more on minimizing losses.

Now I am unsure of your definition of PRM. But notice nowhere in my abovementioned definition of PRM did I mention IDENTIFYING winners or PREVENTING losses. As Risk Management is not in the business of finding trades. It is in the business of MANAGING the outcome of a winning/losing trade. Thus, it does not give traders an "edge" as it does not dictate how many winning/losing trades you have, merely how much you gain/lose from a winning/losing trade.

I hope that clears up the misunderstanding. And maybe you would like to share your definition of PRM!

In order to be successful in trading, it doesn't matter whether you are right or wrong when placing a trade. What does matter is that when you are wrong, you lose a little bit and when you are right, you maximize your gains. Why do most traders (especially day traders) lose? They don't have prudent risk management skills. End of Story. Now, a lot of folks may say, "but the newbie trader doesn't know how to pick entries and exits". While that may be true for some, the real issue is that when they are wrong, they stay married to a position, or add to a position in order to not admit failure. Your best bet would be to learn to embrace failure, learn to shrug it off, learn to admit when wrong and learn to stay in trades that are winners. You see, Prudent Risk Management is not just about placing an initial stop---it's also about managing a winning trade. Remove the focus from high winning percentage. Retrain focus on losing a little and making a lot.

 

[tiddlywinks]

You see, Prudent Risk Management is not just about placing an initial stop---it's also about managing a winning trade. Remove the focus from high winning percentage. Retrain focus on losing a little and making a lot.

Years ago, someone on this forum, I don't remember who or when, posted something like "instead of looking for reasons to exit a winner, look for reasons to continue to hold." or something like that, to that effect.

For me, that was good advise. It changed my point of view and really helped in taking the few "big" winners usually seen in a given day(as a daytrader), and turning them into outsized gains.

Although nowadays, I have specific criteria when to exit or reverse, but the question "are there reasons to stay? is always asked. It's sometimes extremely counter-intuitive and amusing, and certainly a basis for constant learning.

Trade On!

 

[syniczfx]

In order to be successful in trading, it doesn't matter whether you are right or wrong when placing a trade. What does matter is that when you are wrong, you lose a little bit and when you are right, you maximize your gains. Why do most traders (especially day traders) lose? They don't have prudent risk management skills. End of Story. Now, a lot of folks may say, "but the newbie trader doesn't know how to pick entries and exits". While that may be true for some, the real issue is that when they are wrong, they stay married to a position, or add to a position in order to not admit failure. Your best bet would be to learn to embrace failure, learn to shrug it off, learn to admit when wrong and learn to stay in trades that are winners. You see, Prudent Risk Management is not just about placing an initial stop---it's also about managing a winning trade. Remove the focus from high winning percentage. Retrain focus on losing a little and making a lot.

What you have described has no mention or reference to "edge", nor does it prove that PRM is an "edge".

To add support to that statement. Imagine a hypothetical situation where a particular trader keeps getting his trades wrong 100% of the time. Would you agree that PRM could save him from blowing up his account (The logical thing to do here is to stop trading) but could not deliver gains for him?

Basically thats all PRM is. It cant turn a negative position positive. If a trader is that bad to get things wrong enough times, no amount of PRM can turn that around!

 

[userque]

Years ago, someone on this forum, I don't remember who or when, posted something like "instead of looking for reasons to exit a winner, look for reasons to continue to hold." or something like that, to that effect.

For me, that was good advise.

Years ago, someone (not in these forums) told me that people never remember who gave them good advice; they only remember those that gave them bad advice.

 

[tomorton]

Years ago, someone (not in these forums) told me that people never remember who gave them good advice; they only remember those that gave them bad advice.

Come on, who told you that?

 

[Buy1Sell2]

What you have described has no mention or reference to "edge", nor does it prove that PRM is an "edge".

It most certainly does----Your edge is not just against the markets, it's against other traders (and yourself) that are in the markets---. The vast majority of traders will not follow PRM and the traders that do, have the edge.

 

[syniczfx]

It most certainly does----Your edge is not against the markets, it's against other traders (and yourself) that are in the markets---. The vast majority of traders will not follow PRM and the traders that do, have the edge.

Wrong.
Irregardless of whether a trader follows PRM or not, one cannot deny skills and/or a winning strategy is required to profit from the markets. Without those, no amount of PRM can make a trader profitable.

 

[userque]

Come on, who told you that?

I don't remember.

 

[Buy1Sell2]

Wrong.
Irregardless of whether a trader follows PRM or not, one cannot deny skills and/or a winning strategy is required to profit from the markets. Without those, no amount of PRM can make a trader profitable.

All traders have a winning percentage above zero. A trader using PRM can have a winning percentage of less than 10 percent and be profitable. PRM gives you that positive expectancy.