Trading Catechism

[Scataphagos]

Well, here is sort of an aside to what you are saying. One of the biggest problems retail traders have is they can't even get started quantifying their risk. They are looking at charts, and setting stops. That is their risk "structure". If you go to JPM and see their books and how they trader, it is a slew of statistics, hedged books across multiple instruments, all backed by theory and statistics and years and millions if not billions of trades.

Retail traders seek leverage so they can quit their jobs. They are half right. Seek leverage, and bring risk to the minutest level possible. Between those two extremes lies a vast chasm.

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One of the biggest problems retail traders have is they can't even get started quantifying their risk.

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Like most who fail at what they attempt, it's because they don't know what they are doing.

"Quantifying the risk" is as simple as.... "I'm playing for ___________, and I'm risking ____________ that I'm correct.

(The "risking ______"is to account for noise.)

 

[volpunter]

not sure where you are getting at. But the two are incomparable: Different business models, different investment amounts, different market impact. Most retailers do not understand what "edge" even means and they certainly do not trade with edge. Most retailers do not even know which assets to focus on that larger operators in the market cannot touch or do not touch because of limited capacity and turnover in such asset. And one big fault is this whole tertiary industry of retail "dummy-fication" and overall TA snake oil salesmen who promise riches with their BS-ware. It takes a beginner without proper mentor at least a year of experience and steep losses to get to the point and admit that most TA is nonsense and a money losing proposition. Yet so many suckers believe in getting-rich-easy.

Well, here is sort of an aside to what you are saying. One of the biggest problems retail traders have is they can't even get started quantifying their risk. They are looking at charts, and setting stops. That is their risk "structure". If you go to JPM and see their books and how they trader, it is a slew of statistics, hedged books across multiple instruments, all backed by theory and statistics and years and millions if not billions of trades.

Retail traders seek leverage so they can quit their jobs. They are half right. Seek leverage, and bring risk to the minutest level possible. Between those two extremes lies a vast chasm.

 

[nitro]

___________________________________________________________

One of the biggest problems retail traders have is they can't even get started quantifying their risk.

____________________________________________

Like most who fail at what they attempt, it's because they don't know what they are doing.

"Quantifying the risk" is as simple as.... "I'm playing for ___________, and I'm risking ____________ that I'm correct.

(The "risking ______"is to account for noise.)

That only works when you only have one roulette wheel. If you are playing 20 roulette wheels, and somehow they are correlated and interrelated through some structure that gives edge (so not a realworld roulette but a market roulette), then the mathematics lifts off your simple equation.

 

[der_kommissar]

I guess that is a pretty precise depiction. After all transferring risk nowadays has become very cheap and would not satisfy required rates of return. Of course in all those activities there is risk taking involved in one way or the other. The benefit those whales have is deep pockets and brains to intelligently diversify in meaningful size. But every now and then even they go bananas and infest investors/shareholders with the idea that return on equity north of 30% is sustainably achievable. That is when mathematicians with zero understanding of economics and market dynamics start designing funny products that explode in everyone's face.

But let's assume that many of these funds/banks have a similar exposure, and in times of stress and/or illiquidity they will be forced to mitigate that risk in a similar manner...and what happens when it becomes that much more difficult to effectively diversify risk, when global markets become too highly correlated...

 

[Scataphagos]

That only works when you only have one roulette wheel. If you are playing 20 roulette wheels, and somehow they are correlated and interrelated through some structure that gives edge (so not a realworld roulette but a market roulette), then the mathematics lifts off your simple equation.

What? That's total HOGWASH.

The risk of each wheel is the same. No correlation between any of them.

 

[volpunter]

exactly for that reason banks should be banks. And investment bank should not be allowed to hold a banking license in order to socialize their losses the next time we see a correlation crunch and everyone start running for the exit. Guess who made this possible. The same people who do God's work and constantly feed their locusts through to the political machine into all corners of government and regulation. What do you expect?

But let's assume that many of these funds/banks have a similar exposure, and in times of stress and/or illiquidity they will be forced to mitigate that risk in a similar manner...and what happens when it becomes that much more difficult to effectively diversify risk, when global markets become too highly correlated...

 

[nitro]

not sure where you are getting at. But the two are incomparable: Different business models, different investment amounts, different market impact. Most retailers do not understand what "edge" even means and they certainly do not trade with edge. Most retailers do not even know which assets to focus on that larger operators in the market cannot touch or do not touch because of limited capacity and turnover in such asset. And one big fault is this whole tertiary industry of retail "dummy-fication" and overall TA snake oil salesmen who promise riches with their BS-ware. It takes a beginner without proper mentor at least a year of experience and steep losses to get to the point and admit that most TA is nonsense and a money losing proposition. Yet so many suckers believe in getting-rich-easy.

Right, but turn what you are saying upside down. They are looking for edge and then worrying about risk. This is backwards. This is why you see countless of walk forward programs and system vendors quoting results. I claim the other way around is the correct way to approach it. So find a way to play with extremely low risk, and then scale it. The edges that you are looking for then become far more subtle. Unless of course you are doing arbitrage. But that is beyond 99.9999% of retail traders. I am talking about risk type trading. Try to remove the word risk as much as possible.

 

[nitro]

What? That's total HOGWASH.

The risk of each wheel is the same. No correlation between any of them.

Not real roulette wheels. Market "roulette wheels". They are nowhere near the same.

 

[der_kommissar]

exactly for that reason banks should be banks. And investment bank should not be allowed to hold a banking license in order to socialize their losses the next time we see a correlation crunch and everyone start running for the exit. Guess who made this possible. The same people who do God's work and constantly feed their locusts through to the political machine into all corners of government and regulation. What do you expect?

100% agree! Yes, the entire repeal of G-S with Summers, Rubin, et al. back in the late 90's ushered in the era of "mega-conglomerates" with enough leverage to blow up the financial world many times over...I still like the idea of the "partnership" whereby the senior partners would effectively lose their ass if they get into an overleveraged illiquid trade that could bk the firm...it seems the only accountability would be to themselves.

 

[volpunter]

Sorry but I am getting lost. Do you remind me what point you are trying to make? I thought we established that institutions attempt to mitigate risk via diversification and offsetting of activities that are in themselves risky. That is hard to impossible to do for most retailers who are investing 50k, 100k, or 500k. Still not sure where you try to get to.

Right, but turn what you are saying upside down. They are looking for edge and then worrying about risk. This is backwards. This is why you see countless of walk forward programs and system vendors quoting results. I claim the other way around is the correct way to approach it. So find a way to play with extremely low risk, and then scale it. The edges that you are looking for then become far more subtle. Unless of course you are doing arbitrage. But that is beyond 99.9999% of retail traders. I am talking about risk type trading. Try to remove the word risk as much as possible.