Risk management is everything ?
I often hear in trading risk management is everything. Many times the trading gurus, book writers, newsletter sellers, black box sellers are the one proclaiming the diktat that 'risk management is everything'. When you hear such absolute statement there is always second side to it. In most cases it is and " we will tell you how to manage it in our seminar, automated software, newsletter...."
Most of the times such emphasis on a single element is misguided. Sometime back there was an anonymous commentator on this blog claiming entries do not matter, exit is important. As I have said earlier all four element of trading market selection, entries, exits, and risk management are important.
If you look at the risk management elements, today most professional traders follow good principals of risk management. So how come some outperform and others under perform. Or take the mutual funds, they follow very sound risk management principles, they have strict well defined limits on size of position, they frequently ( sometime on daily basis) adjust their risk to maintain their individual and sector risk under control. So how come the vast majority of them under perform the market.
Position sizing as holy grail of trading success is being offered in expensive courses and is being parroted by everyone around. So what explains performance gap of traders following them.
If you take a more holistic approach to risk management you will think very differently and strategies differently. Market selection can reduce your risk. Your entry criteria can reduce your risk. Your exit strategy can reduce your risk. Your frequency of trading can reduce your risk. Avoiding and favoring certain market periods can reduce your risk.Weighing your ideas differently can reduce your risk. There is much more to risk management than position sizing and R multiples.
Most of the times such emphasis on a single element is misguided. Sometime back there was an anonymous commentator on this blog claiming entries do not matter, exit is important. As I have said earlier all four element of trading market selection, entries, exits, and risk management are important.
If you look at the risk management elements, today most professional traders follow good principals of risk management. So how come some outperform and others under perform. Or take the mutual funds, they follow very sound risk management principles, they have strict well defined limits on size of position, they frequently ( sometime on daily basis) adjust their risk to maintain their individual and sector risk under control. So how come the vast majority of them under perform the market.
Position sizing as holy grail of trading success is being offered in expensive courses and is being parroted by everyone around. So what explains performance gap of traders following them.
If you take a more holistic approach to risk management you will think very differently and strategies differently. Market selection can reduce your risk. Your entry criteria can reduce your risk. Your exit strategy can reduce your risk. Your frequency of trading can reduce your risk. Avoiding and favoring certain market periods can reduce your risk.Weighing your ideas differently can reduce your risk. There is much more to risk management than position sizing and R multiples.
Posts
7 comments:
I am new to your blog and like what i have read. I do not use a
stock screener yet but will very soon. Any helpful tips are would be nice. I have traded by the seat of my pants for several years but need some guided methods. Does the scanners accept this formula you have below? Can you also help me with what criters replaces the values in it.
Always looking to learn.
Thanks Brew
Use a significant one day move scan on these stocks. e.g. say a 5% move ( 100 * (C - C1) / C1) >= 5 AND V >= 1000 AND V > V1)
In simple language the scan
( 100 * (C - C1) / C1) >= 5 AND V >= 1000 AND V > V1)
means
Stocks today's price gain is higher than 5%
Volume for today is higher than 100000
Volume for today is higher than yesterday.
The scanner scans using this formula.
Following a 5% plus gain in a stock, there is always some profit taking that can drag the stock down a bit...Will it be useful to incorporate this also in such scans?
-Shiva
Shiva
There is a myth going around that after a 5% or more move, there is a pullback. For every one stock which shows that behavior I will show you 10 stocks in the 100% universe which will never pullback for weeks or will pullback only after after a 20 to 50% plus move( especially if the breakout is after a 65 day or less weakness or if it coincides with major market upturn). Entering after that much move serves no purpose.
The moves in 100% plus universe by and large are runaway moves. Runaway markets are called runaway because they are very fast moving markets and they seldom offer entry on pullbacks.
That is one of the reason why few people psychologically can trade this kind of methodology and that is why I said there is a catch in it. Most highly profitable strategies are psychologically difficult to trade.
Some great points, Pradeep.
"Risk management is everything." This is what the brokers preach. I recently saw a Schwab commercial touting a new system that will exit a client's stock position as soon as it goes against them. Of course, the joke is on the clients as it is the brokers who benefit with the extra commissions any time the position goes through an expectable pullback.
A 3:1 R reward:risk is a joke, especially when active traders apply it to all their entries. Different setups and different markets should be given different amounts of room to breathe as long as volume and volatility continue to change.
That’s true.....I think we all are so used to some ideologies that it is hard to accept anything that contradicts our beliefs especially when you are putting your money on the line.
-Shiva
Kris,
Regarding the 5% figure PraDeep uses, it is a useful tool to find stocks for a watch list. Yes, there is a pull back in some, but many just keep going higher. Take TRCR. It had doubled just since December. Now since Monday, up another 33% and still looking strong. Of course it is harder to find these kind of moves if the market is not healthy but many stocks that are up strong may have another 10 - 15% before they rest. You have to move up your stops to protect the profit. They can turn on a dime.
Post a Comment