The "Aha" Moment!

schweiz said:
Do all these actions not limit the risk? Because then it can be part of risk management.
I am not a pro B1S2 poster, just making reflections on what is what exactly. All a traders does is limit risks; he can not change the behavior of the market so he is submitted to what the market does. Which limits all his action to limiting risks.
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The point is valid in an overall sense... we can not control market behavior. However, in the context of my post it is control of execution. Execution as a result of any one or combination of analysis, opinion, or guessing.

No different than a non-trading business controlling how one advertises, selects product, selects location, or any other factor associated with running a non-trading business.
 
tiddlywinks said:
The point is valid in an overall sense... we can not control market behavior. However, in the context of my post it is control of execution. Execution as a result of any one or combination of analysis, opinion, or guessing.
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I fully agree with that.
 
schweiz said:
I was thinking a bit and made the following reflection: is not everything you do prudent risk management?
Let me explain: the aim of finding an edge is to make money. But nobody can control the market, or knows in advance with 100% certainty what the market will do. So what you in fact do is take action to limit your risk as much as possible. So you use a strategy to limit your risk and have to wait, passively, to see the result. You cannot influence anything.

How can you limit your risk :
  • find an edge that gives you good entries and/or exits
  • put a stoploss
  • change size of position
  • diversify
  • decide when to get in or out (time and/or price)
  • ...
In fact everything you do is: limiting your risk as much as possible.

So maybe the problem is the defintion of "prudent risk management".
It is not the first time that a discussion ends in different interpreting of definitions. So both sides can be right. Depends of how you define "prudent risk management".
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Having an edge doesn't limit your risk at all - it provides a basis for calculating expectancy and justifying the acceptance of risk, if the EV is positive. But even a system with a 99% winrate and 100:1 payoff will blow up eventually if you bet 100% on every trade.

Likewise, if you practice ironclad risk control as to stoplosses etc. but take random entries, you won't make any money in the long run, except by pure luck.

So, it seems clear to me they are logically separate. Calculated expectancy (an entry/exit based edge for traders, or deriving from long-term cash flows etc for investors) tells you when it may be appropriate to accept risk, while risk management is about translating that expectancy into choice of instrument(s), position sizing, portfolio allocations and so forth.
 
schweiz said:
I was thinking a bit and made the following reflection: is not everything you do prudent risk management?
Let me explain: the aim of finding an edge is to make money. But nobody can control the market, or knows in advance with 100% certainty what the market will do. So what you in fact do is take action to limit your risk as much as possible. So you use a strategy to limit your risk and have to wait, passively, to see the result. You cannot influence anything.

How can you limit your risk :
  • find an edge that gives you good entries and/or exits
  • put a stoploss
  • change size of position
  • diversify
  • decide when to get in or out (time and/or price)
  • ...
In fact everything you do is: limiting your risk as much as possible.

So maybe the problem is the defintion of "prudent risk management".
It is not the first time that a discussion ends in different interpreting of definitions. So both sides can be right. Depends of how you define "prudent risk management".
More...
Nice analysis--you are missing an important piece. ---letting winners mature.
 
Specterx said:
Having an edge doesn't limit your risk at all - it provides a basis for calculating expectancy and justifying the acceptance of risk, if the EV is positive. But even a system with a 99% winrate and 100:1 payoff will blow up eventually if you bet 100% on every trade.
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Calculating expectancy and using it to trade is limiting your risk in the long term. If the probability to win is 75% instead of 15% it limits the risk as in the long run your chances are enhanced.

Specterx said:
Likewise, if you practice ironclad risk control as to stoplosses etc. but take random entries, you won't make any money in the long run, except by pure luck.
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Correct as luck can never limit risks. That's why it is called luck.

Specterx said:
So, it seems clear to me they are logically separate. Calculated expectancy (an entry/exit based edge for traders, or deriving from long-term cash flows etc for investors) tells you when it may be appropriate to accept risk, while risk management is about translating that expectancy into choice of instrument(s), position sizing, portfolio allocations and so forth.
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Calculated expectancy is enhancing your chances, enhancing your chances limits the risks.
I agree that there are different types of risk limiting actions. But all these actions have all the same aim: reduce risks.
An entry/exit based edge for traders tries to find the optimal entry/exit, so that will clearly limit the risk.
 
Buy1Sell2 said:
Nice analysis--you are missing an important piece. ---letting winners mature.
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Letting winners mature. That is pertinent on a style a trade, perhaps even dependent on a particular time, volume, or price-range.

And now you've moved into making an important point about PRM... PRM is applicable to all trades, all trading types, and accessible to all traders... As a standalone item, it is impossible for PRM to be "The edge" otherwise all traders using it would be profitable!
 
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