Something IMPORTANT to remember as a trader

A

Amahrix

If you have a big edge, DECREASE your position size.

If you have a small edge, INCREASE your position size.

Wait.. I thought you bet more aggressively if you have a big edge?! I did to but it is the wrong way to look at it.

Here is why

Source: Dynamic Hedging, Nassim Taleb, pg. 65 (http://docs.finance.free.fr/Options/Dynamic_Hedging-Taleb.pdf)

42xfBrV.png
 
Second: It's (almost) all about stop-losses.

For example,

2 traders..
1 with stop-loss at $100,000
1 with a stop-loss at $200,000

Which has higher expected profitability?

They both have the same profitability. But the smallest stop-loss will incur more frequent losses, and infrequent but large gains.

Take lesser risk for the same expected profitability. In turn, your chances of surviving increase because you're able to make more frequent bets over your time frames. Your P&L will have a positive skew: frequent small losses, infrequent large gains.
 
That's all nice theory and stuff but for the most part, it's just that: theory.

Because it is asumed that you determine the frequency of the bet like you do when rolling a dice. Plus it asumes that you can infinitely scale your size up and down. And hint: you don't

HFT aside (which is subject to another whole lot of min/maxing issues) you never know when your best trades present themselves.

I personally adhere to this old trading wisdom: "when all stars align, slap on so much size that you bend over and puke all over your shoes...then subtract one contract"
 
They are some quality a good trader have, firstly to have proper knowledge and skills about forex market secondly to be emotionally and mentally stable yet strong which will always help a trader in his low time or peek times also.
 
You must log in or register to reply here.
Back
Top