Risk of Ruin Discussion

[jackb 10]

I'm continually astonished and amused by people who convince themselves that mentioning how successful or how much money they have made trading will somehow add validity/credence/weight to their comments. In reality, it does the exact opposite and it wreaks of desperation. Everyone knows there is no way to prove such claims...so it's pointless to make them, even if it were true. A little bit more effort in figuring out a way to make or emphasize a point without reverting to such a tactic would result in better discussions, imo.

[gosu 10]

Gosu, your post did indeed push some buttons, I found it dismissive and insulting and replied in kind. I don't feel good about that. Never mind, I appreciate the way you have responded.

 

I don't make any claim to be good. I have been successful, and I have made some fairly significant sums but, like you, it has not been a smooth road, and I am only too aware of my trading weaknesses, which I have to pay constant attention to. I certainly don't sneeze at making a million, I think it is a tremendous achievement, I'm also proud of having done it. I just didn't like the apparent assumption that you could beat me round the head with it.

 

I think we all need to be proud of our achievements -- there has to some reward other than just monetary. I had a great year in my last 12-month accounting period July-to-July -- 65%+ return on a fairly significant account with less than 6% drawdown, 11 winning months and the one losing month closed at less than one tenth of one percent down, trading daily charts. I'm proud of that, but already in my new 12-month period I am down with a nasty streak of losing trades. The markets have a way of humbling us and reminding us of reality. I don't know the future, but I do have a clearly-defined set of rules to deal with the present, and the only thing I know is that the current and recent performance of my system is still within the parameters of normality, so my job is to trade through the drawdown.

 

We all have to find a way to trade that allows us to sleep at night -- to suit our trading personality, as they say. For me, the only way is to focus on risk. To find the appropriate balance between risk and return within my system, and to know exactly the point where my system has undergone abnormal loss -- and know in advance what I will do about that. That alone is not an insignificant task and, for me, may well be the most important one. At that point, I have a plan which covers both the expected and the unexpected, and I have done everything I know to understand and manage my risk.

 

You're obviously trading in a completely different way -- and you're obviously doing great with that. You're prepared to risk blowing out an account in exchange for whatever your expected return is. I can't do that.

 

I would however disagree with this: your previous post said that you wouldn't have made your first million any quicker if you employed risk management. I think perhaps you would -- because your most recent post says that you blew out two futures accounts, one fairly sizeable. Some appropriate form of risk management would almost certainly have helped you avoid the pain of a blown out account and therefore may well have helped you to make your first million quicker...

 

Congratulations on great performance, and good luck...

 

Thanks for the thorough and thoughtful post. Also thanks for sharing your recent performance results. I'm always interested to see the results of skilled traders and how they think about their approach to trading.

 

Judging by your use of a fiscal year, I can surmise that you manage OPM, which is something I avoid entirely. That likely explains a lot of the difference in our approaches and the stats we keep.

 

As you know, my approach is discretionary, directional trading. I do not trade with preset loss parameters as you do, yet I do not consider myself a risk taker at all. I am a believer in avoiding risk and taking the low hanging fruit first prior to looking for additional opportunities. I see the market's risk/reward diagram as a scatter of points all over the graph rather than an upwardly sloping regression line with rising risk for rising reward. There are times when there is essentially no risk to extract. I call this "free money." There are also times when risk of loss is high with little available to extract unless I guess the subsequent direction correctly. I call these times "centering" and "dry up" and I am sidelined during these times because trading is not a 50/50 game to me. In between these two extremes there are various opportunities which I have been able to differentiate over the years and train myself to act accordingly when they are presented. There are still many market positions I have yet to differentiate but I am still relatively young and have many market repetitions ahead of me to learn.

 

I am describing the above as a reply to your assertion that I am prepared to risk blowing out an account to trade the way I do. Because trading is performance based, I cannot rule out the possibility. But I do know that I am only getting better the longer I trade.

 

With regard to whether applying "risk management" could have avoided my early losses, I would say that I knew at the time that "risk management" was very important and meant always having a stop loss in place and taking my losses without exception. What that got me was a disheartening grinding down of my account. I found that rather than having set stops, "scaling" in to trades achieved far better results. I would have a long string of positive days and felt that I was finally on to something until a trade came along to wipe out the gains of prior weeks and even months.

 

I no longer concern myself over "risk management", but strive to stay on the right side of the market at all times and sideline when the right side is not clear to me. Entry price is irrelevant. The lone exception is when the right side immediately becomes unclear after entry and I look to "wash" the trade with costs.

 

If I am sounding like I never record a "loss", I want to dispel that notion. I'm always working on cutting down my losses due to stubbornness, laziness, boredom, euphoria, etc., otherwise known as human errors, which always seem to be there lurking underneath the surface.

 

Cheers and continued success to you.

Edited August 23, 2011 by gosu

[rdhtci 10]

Gosu, your trading methodology sounds very like mine.

 

Judging by your use of a fiscal year, I can surmise that you manage OPM, which is something I avoid entirely...

 

Actually, I don't trade OPM. Having the freedom to record my results any way I like, I have simply started with the date of first trade I placed using my current system, and organized the trades into 12-month periods from that start date, rather than having an orphan period of something less than a year at the beginning. As far as risk-aversion, it's just that I am not so young and a lot of work has gone into building my trading capital, which I would not care to attempt to repeat.

 

I see the market's risk/reward diagram as a scatter of points all over the graph rather than an upwardly sloping regression line with rising risk for rising reward.

I agree with your view of risk. The only circumstance under which I would view it is a rising regression line is in relation to position sizing where, clearly, one is taking on proportionately more risk with larger size. UNLESS... you create your position by scaling in -- which is another matter altogether, and which is also at the heart of my methodology...

 

There are times when there is essentially no risk to extract.

I also look to identify and isolate those moments when risk is statistically minimal although, in my case, I wouldn't call it discretionary because I have reduced everything to rules.

 

I found that rather than having set stops, "scaling" in to trades achieved far better results.

Couldn't agree more. I also use scaling in, and I don't use set stops either.

 

I am more discretionary on exits. Although I do have a system indication for an exit point, I am aware that this is designed to catch a certain move and is not something which is guaranteed to unfold according to the numbers. Consequently, if it appears to me that the move has occurred without quite getting to the calculated exit point, I will watch and weigh the diminishing risk:reward and act accordingly. I have been able to 'beat' the results from the system exits fairly consistently as I get better at this.

 

So, perhaps we trade in a more similar fashion than it seemed initially!

 

Good luck for the future...