RISK and how we deal with it.

[ammo]

not that bright so i try to find simple ways to understand thing
1st, trading is just placing bets
2nd the risk of being wrong is at least 50/50
3rd if you are doing this as a business, your capital is your most important asset
4th 1st rule in biz is to stay in biz, then profit in biz, then grow the biz with larger
profits
with that in mind, you divide your capital by 12 and that number is your monthly max loss, if profitable,you can up that number as the total divided by 12 grows, or you can take that monthly profit avg and make that your new max monthly loss, thus never giving back more than one month
or you can compound by not removing any of the built capital base and divide it by 12,
simple recipe here is never exceed that 1/12th number in risk per month

 

[Redneck]

What RISKs are you taking. and more important what can you do to mitigate or control those risks.

Basically I've 4 categories where I assume risk / potential risk exists - when I trade

Each trade

Me failures

Hardware failures

Extraneous (Family / SHTF incidents / economy / weather / Govt. intervention / war/ who the hell knows / and alike)

More this weekend on what I do to mitigate each...

RN

 

[dbphoenix]

So there is no risk associated with drinking Jim-Jones koolaid because there is no uncertainty (e.g., 100% fatality) associated with drinking Jim-Jones koolaid?

There would be risk only if there were a chance of survival.

 

[kut2k2]

There would be risk only if there were a chance of survival.

I don't buy it. Certain death sounds pretty damn risky to me.

What you saying is that if there's a one in a trillion chance that you survive, then there is risk, but if you do the practical thing and round off one in a trillion to zero, suddenly the risk vanishes. Nope, too capricious for my tastes. The presence or absence of risk shouldn't depend on round-off errors.

 

[SIUYA]

So there is no risk associated with drinking Jim-Jones koolaid because there is no uncertainty (e.g., 100% fatality) associated with drinking Jim-Jones koolaid?

Sorry but that is too weird. Potential means 'might happen in the future' but that doesn't mean the outcome is uncertain. If you live long enough, you will die eventually. The event of you somehow gaining immortality is infinitesmally small (i.e., sufficiently close to zero to be utterly negligible). Fact: someday you will die. There is no uncertainty about the outcome. Does this mean life is risk-free? Of course not. Fact: if you drink Jim-Jones koolaid, that is the day you will die. There is no uncertainty. Does that mean drinking Jim-Jones koolaid has no risk? Ridiculous!!

No - if risk is about the potential of loss of value..... there is plenty of risk in drinking Kool aid. The value of the loss might differ. Just because the outcome might be fairly certain it does not mean there is not risk. Potential for loss can be on the scale of certain to uncertain.

There are two issues here....
risk being associated with uncertainty/certainty and the outcome or end result....
and the loss of value.

When talking of certainty one is by implication talking of uncertainty. Its not a binary 0 or 100 - but a scale.

On reading what you are saying below (I think we are actually saying the same thing)
but I thought it was you who did not want to associate risk and uncertainty.(???) when you said --- "I'm not at all sure I buy this spurious distinction between risk and danger. The insistence of associating uncertainty with risk has Markowitzian hand prints all over it." -- maybe its volatility v uncertainty.
Now as uncertainty and certainty must add to 100% then I think when talking about one you are talking about the other at the same time.

I believe the concept of risk is big enough to encompass outcomes that are both certain and uncertain. Potential for loss need not be uncertain. It need only be preventable by a different course of action. The uncertainty is whether you choose to perform an act that is certain to kill you, not whether performing the act will kill you. And if you're not suicidal and not stupid enough to put your future in the hands of Jim Jones where he has every opportunity to kill you because he is a homicidal maniac, then the risk that you die from association with Jim Jones becomes vanishingly small.

For the Jim Jones example....there are multiple events occuring with increasing chances of a particular outcome which finally leads to the Kool aid outcome, each of those cascading the overall risk.....and this clearly leads into ideas of event independence.

This all could be interesting - and lets face it - risk and how we view it is an ever changing thing. It is only recently we have had any idea that we could either influence it, or indeed measure it and try and mitigate risks - and trade them.

(I also hope this does not turn into one of those toxic crap threads....but there is a high risk of that!)

 

[deaddog]

This all could be interesting - and lets face it - risk and how we view it is an ever changing thing. It is only recently we have had any idea that we could either influence it, or indeed measure it and try and mitigate risks - and trade them.

Can we measure risk as it pertains to trading?

Simplistically I define my risk as a percentage of my capital that I may lose on any one trade. It’s a risk I can measure in terms I can understand.

EI: I am willing to risk X to make Y

However there are also many other risks that can have an effect on the outcome of a trade. Some of them we can have a little control over and some we have no control over.

Thought should be given to all associated risks. Part of a trading plan should include a list of every thing that might have a negative influence on your trade. Along with that list should be a “If this happens then I will do this” type of reaction to a given situation.

I have to take complete responsibility for my actions or lack of action. I should be aware of all the risks going into a trade and have a plan to deal with them as they occur.

 

[dbphoenix]

I don't buy it. Certain death sounds pretty damn risky to me.

Certain death by this means carries no risk at all. But then we're all certain to die.

In any case, since the thread is entitled "Risk and how we deal with it", I assume that the OP is referring to risk as it relates to trading. If it's to be another philosophy thread, I'll pass. Otherwise, there's always The Nature of Risk by Justin Mamis.

 

[kut2k2]

... I thought it was you who did not want to associate risk and uncertainty.(???) when you said --- "I'm not at all sure I buy this spurious distinction between risk and danger. The insistence of associating uncertainty with risk has Markowitzian hand prints all over it."

No, I didn't say risk shouldn't be associated with uncertainty, I said (or meant to say) risk shouldn't be dependant on uncertainty. You can have risk with certainty (drinking the Jim-Jones koolaid) and you can have risk with uncertainty (surviving a school shooting). Whether or nor there is risk in a given situation can be largely independent of whether or not there is certainty in the situation.

Now as uncertainty and certainty must add to 100% then I think when talking about one you are talking about the other at the same time.

I disagree. Certainty and uncertainty are mutually exclusive. Certainty means an event has either 100% probability of occurrence or 0% probability of occurrence. Uncertainty applies to all the probabilities of occurrence between 0% and 100%, excluding those two.

IOW an event is uncertain if and only if its probability of occurrence is greater than 0% AND less than 100%.

 

[kut2k2]

Certain death by this means carries no risk at all. But then we're all certain to die.

In any case, since the thread is entitled "Risk and how we deal with it", I assume that the OP is referring to risk as it relates to trading. If it's to be another philosophy thread, I'll pass. Otherwise, there's always The Nature of Risk by Justin Mamis.

I'm willing to accept the premise that trading risk, as differentiated from risk in general, is bound to uncertainty, as long as we avoid the fallacy of equating the two.

Given that starting point, how should we proceed?

 

[SIUYA]

No, I didn't say risk shouldn't be associated with uncertainty, I said (or meant to say) risk shouldn't be dependant on uncertainty. You can have risk with certainty (drinking the Jim-Jones koolaid) and you can have risk with uncertainty (surviving a school shooting). Whether or nor there is risk in a given situation can be largely independent of whether or not there is certainty in the situation.
I disagree. Certainty and uncertainty are mutually exclusive. Certainty means an event has either 100% probability of occurrence or 0% probability of occurrence. Uncertainty applies to all the probabilities of occurrence between 0% and 100%, excluding those two.

IOW an event is uncertain if and only if its probability of occurrence is greater than 0% AND less than 100%.

I agree risks are not dependent on uncertainty, and we agree they are mutually exclusive......where we differ is probably in the time frame of the discussion.
Pre any event there is always potential and the scale is somehere between 0-100 of uncertainty v certainty only post can we have 100% certainty.....and then it is certainty of that particular event not certainty if that event were to occur again.

(I view it as a scale of 0 to 100%
If you are 20% certain something might occur then you must be 80% uncertain.)

If pre an event you are 100% certain something will occur - then according to this you have no risk.....but we agree that is not the case.
Looking foward the element of potential has to be there, otherwise you are saying 'never' in which case risk is not an issue.

example: we can be 100% certain gravity works in the manner we think but when it comes to trading or any other arena that does not have such certainty then you have to cringe when someone says they are certain of something....only by looking back does this occur. Looking forward there is one example I can think of where certainty in trading exists.
If you buy something for zero.

Lets keep the risk discussion as it pertains to trading shall we?
............
Re DeadDog
"Can we measure risk as it pertains to trading?"

I agree there are also multiple ways of looking at risk - often the real risk is disguised, and we substitute prices or ideas of value and then also subjective guesswork for what risk may actually be taken.
example; selling an option at a high implied volatility does not mean the risk is reduced - the risk is the same we are just compensated for this risk in the price

So you can be fairly certain selling an expensive option gives better value but it is not necessarily less risky then selling a cheap option.

so ultimately in my coffee shop roundabout talk....

Which is why as a starting point when dealing with risk you have to deal with potential - otherwise its not really about risk.
...and why when it comes to measuring it its all a best guess - which is a good place for one to start.

Recognizing that ultimately risk, its measurement and management is subjective.
..............
off for long bike ride - its too bad they dont have mountains in the Netherlands