Correct
Prudent Risk Management Is The Only True Edge In TRADING
- Thread starter Buy1Sell2
- Start date
I'll dispute that!
It depends on the sector or industry the stock is in.
Let me use an example.
The below chart is TXBM & XMM.AX, both are metals & mining sectors.
Over 15 years TXBM has risen 72% and XMM 90%.
XMM (Australia) has outperformed TXBM (Canada) because Aust has better climate which allows mining more continuously.
Ok, lets say 80% over 15 years which equals ~5%pa. Most mining stocks pay no or very little dividends.
Now sectors/indexes have rebalancing at least a couple of times each year.
Also sector/indexes are weighted towards the largest cap stocks which have better chance to survive.
So, 5% pa on the top stocks.
What does that say about the rest?
(Hint: they go nowhere or underwater)
True.I'll dispute that!
It depends on the sector or industry the stock is in.
Let me use an example.
The below chart is TXBM & XMM.AX, both are metals & mining sectors.
View attachment 324831
Over 15 years TXBM has risen 72% and XMM 90%.
XMM (Australia) has outperformed TXBM (Canada) because Aust has better climate which allows mining more continuously.
Ok, lets say 80% over 15 years which equals ~5%pa. Most mining stocks pay no or very little dividends.
Now sectors/indexes have rebalancing at least a couple of times each year.
Also sector/indexes are weighted towards the largest cap stocks which have better chance to survive.
So, 5% pa on the top stocks.
What does that say about the rest?
(Hint: they go nowhere or underwater)
Everything requires judgement. There is no free lunch.
Hmmmm...coukd superior judgement be an edge???
We retails don't call it judgement, we call it bets. PRM says do not bet the farm and you will be fine.Hmmmm...coukd superior judgement be an edge???
You lost me with your last sentence. If so, what should I do?
have you read Minervini "trade like a Stock Market Wizard" ?
Chapter 13 is on Risk management and fairly interesting and relates to PRM..
The first think that needs to be discussed is compounding.Its a huge part of being a successful trader,and also a large double edge sword.Simply put,if you are compounding your account,you better control your drawdowns...
Simple illustration...2 out of 3 trades make 50%,one loses 50 percent...Order doesnt matter,and as you can see,the return is only 12.5% compounded as opposed to a naive 50% guestimate..That big drawdown is a crusher..
More to the point,if you can accurately predict your hit rate,there is an optimal risk to reward for your given hit rate...Again,I am talking with compounding
Example..50% hit rate, 2 to 1 gain/loss ratio, the optimal profit target is 48% with a stop of 24%.That would produce an 80.04% return after 10 trades..
If your hit rate drops to 40%,y0u would lose 7.55% with that given set of parameters.Massive difference,so you can see how important being accurate regarding Winning percntage is.
And FWIW, with a 40% winning percentage,the optimal 2-1 profit target vs Stop is 20% and 10% which nets you 10.2 percent compounded after 10 trades..
Theres more too it,but its a good start
Chapter 13 is on Risk management and fairly interesting and relates to PRM..
The first think that needs to be discussed is compounding.Its a huge part of being a successful trader,and also a large double edge sword.Simply put,if you are compounding your account,you better control your drawdowns...
Simple illustration...2 out of 3 trades make 50%,one loses 50 percent...Order doesnt matter,and as you can see,the return is only 12.5% compounded as opposed to a naive 50% guestimate..That big drawdown is a crusher..
More to the point,if you can accurately predict your hit rate,there is an optimal risk to reward for your given hit rate...Again,I am talking with compounding
Example..50% hit rate, 2 to 1 gain/loss ratio, the optimal profit target is 48% with a stop of 24%.That would produce an 80.04% return after 10 trades..
If your hit rate drops to 40%,y0u would lose 7.55% with that given set of parameters.Massive difference,so you can see how important being accurate regarding Winning percntage is.
And FWIW, with a 40% winning percentage,the optimal 2-1 profit target vs Stop is 20% and 10% which nets you 10.2 percent compounded after 10 trades..
Theres more too it,but its a good start
I don’t know. What are your choices?
You must know, otherwise why did you say stop loss is a poor way to manage risk and R:R ratios are a joke? You must know something better???
I am not arguing with you, just eager to find out if there are better ways.