weekend thread early... topic: risk management, page-4

Danube,

picking winners at better than 50% should be the same probability as picking losers at better than 50%, simply flip a coin.

I try to pick set ups which have a statistical record which stacks the odds in my favour, but if we assume that I am full of it (not difficult) and my statistics are rubbish, then the random result should be close to 50%, slightly skewed to the upside as this has been the long term trend for the few decades I have been breathing.

Probability would therefore be that for 50% of the direction picked correctly, the money management odds of [X] times the reward compared to the risk on any given trade, should tilt the cumulative monetary outcome in my favour, purely by random chance.

Risk control is ensuring that any given string of untoward outcomes can not do sufficient damage to your account that it prevents the edge (developed above) from delivering over a large run of positions.

Put simply, if you stack the odds in your direction, and use conservative position sizes, it makes it more difficult to do major harm by a sequential string of maximum loss outcomes, and gives every possibility of creating a larger buffer against the worst case scenario, before it occurs, assuming that it is only a matter of time before it must occur.

There are of course other things you can do, like entering half a position at the best risk reward entry point, and pyramid the other half on the next confirming signal, to get your win ratio up, if that is what you want. The question is, would the amount you sacrifice through conservatism outweigh the elimination of a small percentage of minor losses.