Prudent Risk Management Is The Only True Edge In TRADING

[hyom]

Risk management is unrelated to having an edge.

If you have no edge but good risk management, you die by a thousand cuts. Slowly but surely.

If you have an edge but no risk management, you will make money for some time until one day one big chop comes along and you die instantly. Suddenly but surely.

If you have an edge and good risk management, you will live long and prosper.

 

[ironchef]

Risk management is unrelated to having an edge.

If you have no edge but good risk management, you die by a thousand cuts. Slowly but surely.

If you have an edge but no risk management, you will make money for some time until one day one big chop comes along and you die instantly. Suddenly but surely.

If you have an edge and good risk management, you will live long and prosper.

I came to the realization nobody knows exactly what risk management is. Everyone has their own definition, it ranges from practicing fractional Kelly to something very esoteric like the article I quoted. What exactly is your definition of risk management sir?

 

[hyom]

I came to the realization nobody knows exactly what risk management is. Everyone has their own definition, it ranges from practicing fractional Kelly to something very esoteric like the article I quoted. What exactly is your definition of risk management sir?

First, please don't address me sir. We're all equals in the online world.

I don't have exact definition of risk management. It is a process and can't be defined purely by practising something like fractional Kelly. In my book, risk management is a process to ensure long-term survival when one has an edge.

 

[ironchef]

First, please don't address me sir. We're all equals in the online world.

I don't have exact definition of risk management. It is a process and can't be defined purely by practising something like fractional Kelly. In my book, risk management is a process to ensure long-term survival when one has an edge.

I know it is getting to be circular, but if you have a process and it is called risk management, without it you lose money and have a high chance of wipe out, with it you make money, then, risk management is your edge???

An example is stop loss. Most of us defined SL and a key part of risk management. Many trading strategies would fall apart without SL, so risk management is the TRUE edge in those particular strategies?

 

[userque]

...An example is stop loss. Most of us defined SL and a key part of risk management. Many trading strategies would fall apart without SL, so risk management is the TRUE edge in those particular strategies?

I don't have a dog in this fight, but let's suppose that in your same example, if you went with a random entry, rather than the strategy's entry, and the strategy also failed, even with the stop-loss. Would risk management still be the TRUE edge, in your opinion?

 

[ironchef]

I don't have a dog in this fight, but let's suppose that in your same example, if you went with a random entry, rather than the strategy's entry, and the strategy also failed, even with the stop-loss. Would risk management still be the TRUE edge, in your opinion?

Like you I actually don't have a dog in this fight either, and I didn't say risk management is THE TRUE edge, I was asking could it be AN edge..

I have no opinion, just trying to understand risk management and what it really does.

What do you think?

 

[userque]

Like you I actually don't have a dog in this fight either, and I didn't say risk management is THE TRUE edge, I was asking could it be AN edge..

I have no opinion, just trying to understand risk management and what it really does.

What do you think?

Ok, gotcha.

Using a default Google definition of "edge", that I can agree with:

"a quality or factor that gives superiority over close rivals or competitors."

If everyone is doing it, or knows about it, it can't be 'an edge,' by definition, imo. This is so whether it's the entry or exit or hedging or risk management, or anything else, strategy.

So all of the usual suspects (kelly, etc.) can't be edges, imo. (Unless they are being utilized in some novel way.)

You can enter with a standard MA crossover; and have an edge with risk management and exit strategy,

Or you can enter with a strategy that has an edge regarding entries; and have basic kelly risk management with a typical exit strategy.

Edges aren't mutually exclusive, imo.

 

[Newc2]

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.

Staying in trades that are winners is a moot point. Risk management throughout the trade is paramount as per the next point.

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.

This is the key point in the original post. It has a different meaning depending on whether you are (a) a trend follower or (b) somebody playing for a profit target.

For a trend follower the potential reward to risk is uncapped because they end of the trend is unknowable.

As a position fluctuates up and down throughout a trade, it is the risk that needs to be managed though the use of a trailing stop loss as the lower win rate needs to be compensated for by ringing the cash register when the trend reverses.

However for somebody playing for a profit target, trade management becomes even more of a mathematical undertaking. The calculator should always be at hand.

For these traders, the potential reward to risk is always definable, changing throughout the trade, and should therefore always be calculated in an ongoing process.

Eg a position that in near the profit target (ie a big winner) could be offering a much lower reward to risk than the same position upon initiation, IF the trade is not managed correctly.

So as to the title header, I would say “prudent risk management is the BEST edge in trading as setups are a dime a dozen. This is what makes or breaks traders”

 

[777]

Know your edge, exploit your edge-- survive the game

Prudent risk management is not an edge, it is a separate factor to manage.

Risk management will not turn a negative expectation game into a positive expectation game! Try managing your risk on an unbiased and honest roulette wheel.

Professional gamblers and professional traders weave positive expectation, variance, volume into a livelihood.

Line Up:

Edge
Risk management
Volume
Opportunity cost

 

[virtusa]

If 90% of all (day)trader lose money, I know already part of these losers. Almost 30% in this poll confirm that "prudent risk management is the only true edge in trading". So they basically say that indicators or anthying else are no true edges and for that they are useless.
This 30% belong to the 90% losers.
Let's now find out who the others are.

According to Baron:EliteTrader.com is a group of 100,000+ financial traders that have meaningful conversations to help each other learn faster, develop new relationships, and avoid costly mistakes.

I don't see that ET helps to avoid costly mistakes. At least for 30% it does not help.
I also see that many don't want to learn (not just not faster, but not at all) as they are so stubborn that they will never learn anything. Huge ego's are problematic on ET too.