Prudent Risk Management Is The Only True Edge In TRADING

[comagnum]

Did you mean to say..."Virtually every wildly successful INVESTOR places risk mgmt as the most important aspect in INVESTING"? As a short term TRADER I would die without my edge!

PTJ - Traded cotton futures all day and than traded gold in the the night time session in his earlier years, he now runs a hedge fund. He is a traders trader that has made billions. It's not how many trades you make that matters, the idea is to make your equity curve point north & stay that way.

Big firms trading for decades, with endless capital, PHD programmers from the top universities, scores of seasoned traders, expensive ultra low latency networks, and dozens to hundreds of systems running decade after decade still place their top priority on RM. Entry signals are cyclical, at some point they all have piss poor performance. The markets are always changing - true edges are fleeting.

Novice traders become obsessed with entry signals, been there done that . Only the Citadels of the world truly have a static edge - it cost them a few hundred million for the infrastructure and relationships. In decades of reading and listening to interviews with the best traders every single one of them spoke in length on risk/trade mgmt & psychology , not a one ever claimed they had an edge from their entry signals.

Entry signals are a big rabbit hole. Once you have that ahaa risk mgmt moment you will never look back. It is only natural for newer traders in their first 1-10 years or so tend to get stuck on entry signals. The best traders all have one thing in common, they all consider their RM is what separates them from the many losers.

 

[ironchef]

your time would be much better spent buying a lotto ticket

You may be right. Read this:

http://www.masslive.com/news/index.ssf/2017/08/mass_lottery_officials_to_crac.html

A version of the 20/20 list provided by the Lottery includes players who have cashed, on average, as many as four $1,000 Lottery prizes every day so far in 2017. Among them is Ali Jaafar of Watertown, who so far in 2017 has claimed 936 prizes from the Mass. Lottery -- an average of more than four wins per day -- totaling $1,322,482.50. On July 31 alone, the Lottery records show, Jaafar claimed 18 prizes -- 15 from instant tickets and three from Keno -- worth just under $20,000.

The list also includes Frank Obey of Lynn, whose 609 winning tickets so far in 2017 have netted him a total of $1,105,456. And it includes Clarance Jones of Lynn, whose winning streak first caught the attention of the Lottery and state auditors almost two decades ago.

In 1998, Jones cashed in 319 tickets worth $412,482

So, yes, you can consistently win the lottery if you know the system, work out the probabilities and will definitely get a positive return. Better than day trading.

 

[BONECRUSHER]

Firms have to make "risk" their priority...especially if they use leverage. They know that risk comes first or they risk not having a firm at all...possible lawsuits. There's just too much on the line to not have strict risk management. Plus, the firm must attract clientele and the best way to make investors feel good is to sell the idea "your money is safe with us". Firms are businesses that want fees more than anything else. I don't think individual traders should necessarily think like a firm.

If PTJ day traded cotton/gold in the early part of his career there is no way he didn't have a strong conviction about "where" to enter for turning points(tops and bottoms)...by the way it's his favorite way to trade.

I agree that entry signals can be cyclical, but that's a big part of my edge...knowing when conditions change and adjusting to a previous edge if necessary. I believe many top traders had an edge with a long cycle life and they minted money while it lasted(turtles)...then they decided to manage other peoples money off of their fame!

Comagnum...you even said earlier in this thread that risk management "wasn't the edge", but was a big part of it. So obviously there's more to your trading than controlling risk.

 

[ironchef]

This makes sense and I hope this works out for you! But you might also consider that B1S2 is saying risk management is the "METHODOLOGY"...what you're saying is risk management is improving your methodology into an edge...BIG DIFFERENCE! P.S. Otherwise you could just enter randomly...if B1S2 is correct.

Thank you for your suggestion.

I did a backtest of SPY at one time: Bought at open and sold at close as a way to approximate random day trading. You know what? I got positive return on a 10 years run (ignoring commissions and bid/ask). I can run the same test using a stop instead of sell at close. Of course some wins will be stopped out but the outcome should give an indication.

Regards,

 

[Frederick Foresight]

"Is Prudent Risk Management the only true edge in trading?"

Jack Schwager, who interviewed about 5 dozen successful traders over a period of 25 years and wrote about it in his 4 Market Wizards books covering about 2,000 pages, wrote the following in The Little Book of Market Wizards:

There is a Wall Street adage that says, "Even a poor trading system could make money with good money management." Have you heard that saying before? Well, if you have, forget it, because it is really one of the stupidest things that has ever been said about trading.

Good money management is essential, of course, because without you don't have a chance. It is a requisite, not an edge.

 

[MrScalper]

"Is Prudent Risk Management the only true edge in trading?"

Jack Schwager, who interviewed about 5 dozen successful traders over a period of 25 years and wrote about it in his 4 Market Wizards books covering about 2,000 pages, wrote the following in The Little Book of Market Wizards:

There is a Wall Street adage that says, "Even a poor trading system could make money with good money management." Have you heard that saying before? Well, if you have, forget it, because it is really one of the stupidest things that has ever been said about trading.

Good money management is essential, of course, because without you don't have a chance. It is a requisite, not an edge.

it is a pre-requisite..spot on..only fools place all of their eggs in one basket..if you lose all of your money in a short time..then..you are out of the game..make it last so that you can learn the ropes.. plain and simple

 

[ironchef]

This makes sense and I hope this works out for you! But you might also consider that B1S2 is saying risk management is the "METHODOLOGY"...what you're saying is risk management is improving your methodology into an edge...BIG DIFFERENCE! P.S. Otherwise you could just enter randomly...if B1S2 is correct.

I programed a backtest run with random entry and trailing stops (with different stop loss level) on my data set and got very profitable outcome until I realized my data set didn't have the details for me to run trailing stop backtest so the profits were an illusion.

I did the next best thing: Using real time data and trailing stops to day trade random entries. Ran about a couple of weeks: So far not very profitable when I just randomly entered at any time. I supposed if it is so easy we will all be billionaires.

If you have a better idea I am all ears.

 

[BONECRUSHER]

I programed a backtest run with random entry and trailing stops (with different stop loss level) on my data set and got very profitable outcome until I realized my data set didn't have the details for me to run trailing stop backtest so the profits were an illusion.

I did the next best thing: Using real time data and trailing stops to day trade random entries. Ran about a couple of weeks: So far not very profitable when I just randomly entered at any time. I supposed if it is so easy we will all be billionaires.

If you have a better idea I am all ears.

I'm glad you're still plugging away trying to find that edge, but I'm not a believer of anything random. Also, I only trade natural gas and gold futures...no ES, stocks, or bonds for me anymore...options and long term stocks in investment accounts are OK.

So, are you trying to find a random only entry with good R:R type of method? It almost sounds like you've tried everything else and now you might as well try the random thing? If true, that's not something I have much confidence in. Maybe someone like Buy1Sell2 might agree with this approach.

When you said something about a "sweet spot" for every methods risk vs. gain in a previous post...I very much agree. The only thing I would add is market conditions can and will mess with that "sweet spot" and throw you off...some are more sensitive than others...be ready to adapt. This is why risk management is so important, because if you are slow to adapt your method the losses will pile up, especially if you hold onto positions that you should've been stopped out of.

That said, my edge is based on experience of knowing how my "sweet spot" is being compromised and how to adjust it. Sometimes I go for long periods of time without any adjustments...like the last few years. This is why I concentrate on nat gas and gold...they are different animals, but I know they will always be consistently wild. I can't predict the ES market the same way...had to adjust more frequently even though it's slower...maybe the algos are the culprit?

My only advice: get very creative with your charting. Be prepared to discover something unique. Try to find a "type" of chart and time frame that will hold any kind of "sweet spot" with staying power. You don't want a chart that is too sensitive to conditions. I'm not saying a long term chart is the answer and I personally hate one minute charts. In fact, it seems I use different charting than what most people use or talk about. To be honest, it's not charts that have the magic, it's the magic your mind sees with a particular picture in front of it...find your picture. Good Luck!

 

[ironchef]

I'm glad you're still plugging away trying to find that edge, but I'm not a believer of anything random. Also, I only trade natural gas and gold futures...no ES, stocks, or bonds for me anymore...options and long term stocks in investment accounts are OK.

So, are you trying to find a random only entry with good R:R type of method? It almost sounds like you've tried everything else and now you might as well try the random thing? If true, that's not something I have much confidence in. Maybe someone like Buy1Sell2 might agree with this approach.

When you said something about a "sweet spot" for every methods risk vs. gain in a previous post...I very much agree. The only thing I would add is market conditions can and will mess with that "sweet spot" and throw you off...some are more sensitive than others...be ready to adapt. This is why risk management is so important, because if you are slow to adapt your method the losses will pile up, especially if you hold onto positions that you should've been stopped out of.

That said, my edge is based on experience of knowing how my "sweet spot" is being compromised and how to adjust it. Sometimes I go for long periods of time without any adjustments...like the last few years. This is why I concentrate on nat gas and gold...they are different animals, but I know they will always be consistently wild. I can't predict the ES market the same way...had to adjust more frequently even though it's slower...maybe the algos are the culprit?

My only advice: get very creative with your charting. Be prepared to discover something unique. Try to find a "type" of chart and time frame that will hold any kind of "sweet spot" with staying power. You don't want a chart that is too sensitive to conditions. I'm not saying a long term chart is the answer and I personally hate one minute charts. In fact, it seems I use different charting than what most people use or talk about. To be honest, it's not charts that have the magic, it's the magic your mind sees with a particular picture in front of it...find your picture. Good Luck!

Thank you for your encouragement. It is always heart warming to find a helpful well wishers here.

Why am I trying everything? Well, for starter, my profits are lumpy so I am looking at anything that can help smooth things out. I also belong to the naturally curious type and love to try anything and everything I can get my hands on.

Best wishes to you.

 

[Buy1Sell2]

The secret to successful trading is cutting losers short and letting winners run to maturity with full position on. It has nothing to do with winning percentage. This is undeniable and inarguable.