Books about Risk Management

[beerwm]

Hi

I'd just like to hear some opinions on good books regarding managing risk in the sharemarket.

I think it is a portion that is overlooked by newcomers

thanks

 

[tech/a]

Re: Books of Risk

Hi

I'd just like to hear some opinions on good books regarding managing risk in the sharemarket.

I think it is a portion that is overlooked by newcomers

thanks

Indeed!!
Seen as boring and often not a requirement.
But you and many others have found this to be far from reality!
For some often too late or after costly lesson.

"The Trading Game"
Ryan Jones is one.

"Mastering Risk"
Mike Lally

Is an excellent basic understanding for anyone.

There are many exciting ways of better using your funds.
When you get into the understanding and application of Risk management you can then move forward into better use of Leverage,Better use of compounding,which can turn your profit results on their head.

Trades remain constant---application of your Money becomes smarter.
Questions soon arise---or should--like.

How does my risk management alter when pyramiding for example.
When compounding profit or deducting loss how does this alter my application?
An exciting world---well for me anyway!

 

[It's Snake Pliskin]

Re: Books of Risk

Indeed!!
Seen as boring and often not a requirement.
But you and many others have found this to be far from reality!
For some often too late or after costly lesson.

"The Trading Game"
Ryan Jones is one.

"Mastering Risk"
Mike Lally

Is an excellent basic understanding for anyone.

There are many exciting ways of better using your funds.
When you get into the understanding and application of Risk management you can then move forward into better use of Leverage,Better use of compounding,which can turn your profit results on their head.

Trades remain constant---application of your Money becomes smarter.
Questions soon arise---or should--like.

How does my risk management alter when pyramiding for example.
When compounding profit or deducting loss how does this alter my application?
An exciting world---well for me anyway!

To be honest Tech, the Trading Game is not too practical for straight stock trading.

Read Fooled by Randomness before buying too many books on theory. But Mastering Risk is a good read.

 

[GumbyLearner]

Re: Books of Risk

Sun Tzu's Art of War

 

[howardbandy]

Greetings All --

Books about risk management -- in alphabetical order --

Aronson, David, "Evidence-based Technical Analysis", Wiley, 2007.
Bernstein, Peter, "Against the Gods", Wiley, 1996.
Drobny, Steven, "Inside the House of Money", Wiley, 2006.
Jones, Ryan, "The Trading Game", Wiley, 1999.
Lowenstein, Roger, "When Genius Failed", Random House, 2000.
Poundstone, William, "Fortunes Formula", Hill and Wang, 2005.
Taleb, Nassim, "Fooled by Randomness", Norton, 2001.
Taleb, Nassim, "The Black Swan", Random House, 2007.
Tharp, Van, "Trade Your Way to Financial Freedom, 2nd Edition", McGraw-Hill, 2007.
Tharp, Van, "The Definitive Guide to Position Sizing", IITM, 2008.
Vince, Ralph, "Portfolio Management Formulas", Wiley, 1990.
Vince, Ralph, "The Mathematics of Money Management", Wiley, 1992.
Vince, Ralph, "The New Money Management", Wiley, 1995.
Vince, Ralph, "The Handbook of Portfolio Mathematics", Wiley, 2007.

And, coming in fall (September or October) 2009, techniques for implementing portfolio management, risk management, and position sizing when using the AmiBroker platform:
Bandy, Howard, "Advanced AmiBroker", Blue Owl Press, 2009.

Many of the techniques described in these books apply best when the position size can be varied, and may not be helpful at all when trading stocks without margin. Ryan Jones describes a method for position sizing named fixed ratio; Ralph Vince describes a method for position sizing named fixed fraction. Both of these methods depend on the ability to change the leverage by buying more contracts or options. By all means, read Jones' book and all of Vince's books. But be very careful applying their position sizing methods. Be certain that your trading system has a positive expectancy and has passed the most rigorous walk-forward and out-of-sample testing. Both fixed fraction and fixed ratio will turn a profitable system into a spectacular system -- and they will both turn a losing system into a bankruptcy.

Taleb makes a very strong case that we cannot anticipate rare, but significant, events. His investment advice, interpreted by me, is: place most of your funds (say 90%) in a low risk, but probably low return, position -- say a savings account; and place a small portion of your funds (say 10%) in a high risk, potentially much higher return, speculative position -- say by using options or futures. Adjust the two positions so that you will, on average, achieve the return you hope for. Be prepared for a rare gain that makes your speculative position very profitable, and equally prepared for a rare loss that wipe it out. In either case, rebalance using the cash you have keep safe and continue your trading and your life.

Note that most of the financial failures have been due to excessive use of leverage. Long Term Capital Management, Enron, Lehman Brothers, and so forth. In a word -- intelligent risk management is about keeping leverage at a reasonable level.

Thanks for listening,
Howard

 

[shulink]

Try this book, The Essentials of Risk Management by Michel Crouhy, Dan Galai, Robert Mark

 

[classer]

And, coming in fall (September or October) 2009, techniques for implementing portfolio management, risk management, and position sizing when using the AmiBroker platform:
Bandy, Howard, "Advanced AmiBroker", Blue Owl Press, 2009.

So, this bloke Bandy....is he any good?

 

[kam75]

Hi

I'd just like to hear some opinions on good books regarding managing risk in the sharemarket.

I think it is a portion that is overlooked by newcomers

thanks

By newcomers and experienced traders alike. Money management and risk control are perhaps the single, most important components of a trading system.

 

[beerwm]

Thanks for the replies everyone,

I think ill pick up Mastering Risk by Lally as a starter,

Thanks for the list Bandy, i was reading reviews on amazon and a quite few look really beneficial.

 

[Temjin]

So, this bloke Bandy....is he any good?

I hope you are not being sarcastic about it. If not, then you will know what I mean.

By all means, read Jones' book and all of Vince's books

Enough said. These are your best sources and highly recommended.

As for the comments how to balance your overall investment portfolio with your trading system and other investments, it would highly dependent on the person's risk profile and financial circumstances. Remember your trading system, even if it is diversified by multiple strategies and markets, is still considered as one single asset with the biggest risk being the person trading it.

If I ever had the money, I would have diversify it among other professional managed future traders. It's off topic of course.

Anyway, those books would get you started and put you WAY AHEAD of many other traders who ignore the concept of position sizing.

Howard, do the concepts in your latest book applies to other trading softwares? Thanks.

 

[Nick Radge]

Another for consideration is Van Tharps "Special Report On Money Management". I think its only available from the web site but I'd recommend it (not sure if its been updated since I saw it last).

Ralph Vince is pretty heavy going and very theoretical.

 

[It's Snake Pliskin]

Thanks for the replies everyone,

I think ill pick up Mastering Risk by Lally as a starter,

Thanks for the list Bandy, i was reading reviews on amazon and a quite few look really beneficial.

A point to consider*

Do you want to get theoretical or philosophical?

Being too theoretical will not be practical when trading straight stocks only. What's the point in learning about multiple contracts when you only trade one stock lot. Wanting to be a pro trader who trades many things will need to be theoretical and philosophical and learn about multiple contracts.

Mastering Risk is a good choice for its practicality and appropriate target audience. Fooled by Randomness for its philosophical content. Against the Gods for its philosophical content. I agree on Van Tharp's special Report which is both theoretical practical and philosophical. (you may find it for free on the net if you look hard)

More philosophical stuff:
1. The Misbehavior of Markets - Benoit Mandelbrot (fractals)
2. Complexity Risk and financial Markets - Edgar E. Peters (very appropriate for the current situation of the world's markets)
3. Stock Market Profits - R.W. Schabacker (old but a classic on all aspects of stock markets)

Only after reading many books can you feel confident that you understand what risk is.

 

[chops_a_must]

So, this bloke Bandy....is he any good?

Very good.

Between Nick Radge and Howard, I think you can do quite well as a trader, just from reading these two.

 

[beerwm]

I just read Van Tharp's 'Money Management Report'

It has alot of concepts that ill have to reread to fully grasp, but i'd recommend it to those interested in varying approaches to money/risk management.

 

[howardbandy]

Anyway, those books would get you started and put you WAY AHEAD of many other traders who ignore the concept of position sizing.

Howard, do the concepts in your latest book applies to other trading softwares? Thanks.

Hi Temjin --

The concepts, particularly regarding position sizing and risk management, have been pretty well defined by other authors. There will be enough detail and derivation for the discussion to make sense, but I do not plan to go into much depth regarding the math behind fixed ratio, fixed fraction, and so forth.

It is the practical application that is missing. Questions that I get asked regularly are along the lines of "OK, I understand the math. Now show me how to actually implement position sizing and portfolio management, and measure my risk." As with my earlier book, Quantitative Trading Systems, it is necessary to pick a specific trading system development platform and write the actual code. Solutions demonstrating all of the topics I plan to cover can be programmed in AmiBroker through use of the "custom backtester", so I plan to use AmiBroker in the book. There may be other platforms that can also be used. Perhaps some of the list followers who are more expert in them than I will be able to translate from AmiBroker to those others.

Thanks,
Howard

 

[howardbandy]

Being too theoretical will not be practical when trading straight stocks only. What's the point in learning about multiple contracts when you only trade one stock lot. Wanting to be a pro trader who trades many things will need to be theoretical and philosophical and learn about multiple contracts.

Hi Snake --

You are correct in your statement that position sizing cannot help much if you are trading a single stock. But there are options -- literally and well as figuratively.

I plan a section showing how a trading system that is based on a broad index -- say the S&P 500 -- can be traded in many ways, many of which allow use of leverage and enable position sizing.

A brief list is:
trade SPY (the S&P 500 ETF)
Use margin
Trade the eMini S&P futures contract
Trade the eMini with various leverage
Trade the + and - beta ETFS based on the S&P
Trade options on the SPY or on the S&P futures contract -- considering options that are in-the-money, at-the-money, and out-of-the-money.

I have data for the Australian markets and may include examples from them as well.

Thanks,
Howard

 

[It's Snake Pliskin]

Hi Snake --

You are correct in your statement that position sizing cannot help much if you are trading a single stock. But there are options -- literally and well as figuratively.

I plan a section showing how a trading system that is based on a broad index -- say the S&P 500 -- can be traded in many ways, many of which allow use of leverage and enable position sizing.

A brief list is:
trade SPY (the S&P 500 ETF)
Use margin
Trade the eMini S&P futures contract
Trade the eMini with various leverage
Trade the + and - beta ETFS based on the S&P
Trade options on the SPY or on the S&P futures contract -- considering options that are in-the-money, at-the-money, and out-of-the-money.

I have data for the Australian markets and may include examples from them as well.

Thanks,
Howard

Thanks Howard

 

[kam75]

I forgot to mention 'keeping it simple'. Have a read on how to use "The 2% Rule" in your trading and read about position sizing. Probably find this info on many trading sites tru google. Actually reading some parts of Stan Weinsteins book "The Secrets for Profiting in Bull & Bear Markets" may help you. Also, there's a hell of a good few pages on how to scale your positions based on your equity in Larry Williams book "Long term Secrets to Short Term Trading". There are other books that focus exclusively on managing risk but some overcomplicate the process. Keep it simple!
regards