Days of our lives - Episode XX Wrx, here is an attempt to move...

Days of our lives - Episode XX

Wrx, here is an attempt to move away from turn dates. Let me give you one little pearl that could change the way you think about trading.

Do not think about 'stops' alone. The term is just one element that is part of a bigger concept called 'risk'. If you start thinking about risk you then start to realise that there are many more ways to get a good reward and protect capital on the basis of the risk assessment. For any given set up there is a risk and reward at play and I make a judgement about what I do about it.

It is even bigger than that. Everything on the market has a value, even high risk events. If you can value them then you can trade them in a calculated way. That is why options were developed - to manage risk and valuing uncertainty. If there was a major news event or the fed was going to release some information. Is it tradeable? Yes it is! But it is commensurate to the risk.

In your day to day trading how do you manage risk? What are your bet sizes, fixed etc? The way I do it is that I have a scale of one to five, ranging from certainty to uncertainty with three divisions separating them. The first one, certainty, can be discounted - from my perspective anyway nothing in financial markets are certain. On any given trade, I have different money management rules, and systems for different trading events based on the above five categories. I also have risk calculated for different parts of the business cycle and I also use my turn dates to get a good picture of risk vs reward. When my turn date gets hit my system goes into a particular mode to capture any move on the basis of the risk profile as above. I then set up stops after I have made a judgement or valued the bigger picture.

Any WRX I hope that changes the flavour from turn dates.

Here are two books that I suggest that you get a hold of

1. The education of a speculator by Victor Niederhoffer
2. Against the Gods by Bernstein

If you are interested in how Hedge Fund managers think about risk go to the following web address (run by Paul Wilmott - Mr Quant)

http://www.wilmott.com/index.cfm?NoCookies=Yes&forumid=1

Taleb's book titled "Fooled by Randomness" might be worth reading but as a trader I am not a big fan of efficient market theory and random walk. Buffet is a good example to counter the theory. Good read anyway.