RISK

[lesm]

Shouldn`t being proven right by the markets be a good reason to exit? At times I think so.

Snake, et al.,

There are differing views and it doesn't mean that either view is incorrect. It is important to understand the risks and consequences. Without this understanding traders financial well being can be at extreme risk with respect to more aggressive trading styles.

A similar/related thread was started on elitetraders (http://www.elitetraders.com/), but like alot of threads there it went off on tangents. It was about defensive trading, which has similarities related to the being proven wrong.

A comment/observation that was made though is that when you observe agressive traders in action, is that they are highly cognisant of the risks. This style of trading requires a particulr mindset/psycholoogy and is not for the faint hearted or risk averse. You can win and lose big in the 'wink of an eye'.

One of the biggest risks to a lot of traders is themselves.

Beginners luck can also be a dangerous trap to fall into. This can lead to overconfidence and overtrading. It may also lead to trader carelessness as they start to overlook the risks until the market savages them severely. Especially, if they stop following their plan/methodolgy and the effective risk levels increases to a dangerously high level.

The market is a hard and unforgiving task master. Markets, such as the one we have at the moment can make traders careless and overconfident.

Absolutely correct and here in lies where most get it wrong----your not trading the technicals OR if your method and numbers were designed around Fundamentals--then the Fundamental analysis---your trading a methodology PACKAGE (Or if you can associate with it better---a Business Model) which has a positive expectancy.----distinctly different again!!!

To reiterate and reinforce tech/a's quote, this is an aspect that short/mid/long term traders need to get their heads around.

Entering a trade is simple, even using a random entry based approach.

The managment of the trade is what is critical, as this what makes or breaks any trade (winning or losing) and can save a lot of heartache. Brent Penfold in 'Trading the SPI' highlights this aspect, as part of what he refers to as the 'Holy Trinity'.

If anyone's interested they may like to look at the Risk Metrics site, which was setup as a specialist group by JP Morgan's (http://www.riskmetrics.com/).

Registration is free, but what may be of particular interest is the RiskMetrics Guide and the RiskMetrics Technical Guide.

cheers.

 

[lesm]

tech/a,

Some of this discussion may be more approprite in a thread on system design rather than risk. Happy to discuss design aspects with you anytime, here or on reef.

Yes and the resounding result was do not set a profit target or trailing stop (of course you could and results were positive however far below the finally accepted methods results) and give the exit plenty of room. The balance comes in the length of the EMA,and thats only to smooth the curve.

If I can clarify what you're saying here. Is it that as long as an identified candidate stock meets the criteria you will enter trade based solely on positive expectancy?

Which means for the sake of an example if the PE is = 0.7, which means that probability of a loss is 0.3 you take the trade.

If your trade is correct then your profit could be anywhere from breakeven to whatever the market will give you, less what you give back + trading costs, depending on the level at which your exit is hit.

This where we move into the aspect of real profit as opposed to unrealised profit.

If I was looking at a worst case scenario this could even be a negative return.

Please note: that I have deliberately ignored your initial stop loss for the sake of this clarification.

If I recall correctly your exit is based on a 180 period EMA, which is a slow moving, lagging, curve fitting indicator.

Having said the above, I know that you have been doing/done work on looking at exit strategies, so accept the above as an example and not a criticism.

Maybe so with a shorter term methodology such as Radges.However longer term your resultant execution will only at best have a 50/50 result,in correctness. One wrong could mean the opportunity of 300% or more is missed.

I understand what you are saying here, but would contend that this is based on the scope of testing and universe of tests that you have conducted and may not be totally valid/accurate in all cases. There is always a risk of giving back profits or missing opportunites, as per you comment below related to available capital.

There is also an assumption in the above that systems, such as T/T will always pick the best cases. I would contend that this sis a questionable assumption, especially if your trades are solely based on postive expectancy. Even using 'bang for buck' won't provide this level of assurance.

The question of available capital then comes into play.
Say I sell CTX as it looked weak at $8 and I bought Something else.
Next thing at $9.15 CTX is triggered again and there is no available funds to trade,Im fully committed.
I'm sure you see my point,diving in and out of stocks is a habit of discretionary traders who bleed to death and suffer more emotional swings than Melanie Griffiths.

I see your point and I am very aware of all the great work you have done over the years and your early days on stock central and reef. Therefore, I would never discount your comments without due consideration, but I will not necessarily always agree with you.

Available capital will always be a factor. How many trades could you have taken that you didn't that may have been more profitable than the ones siting in you current portfolio.

Yes, you or I could have sold CTX at $8, but around that time (sorry I haven't checked the Charts) from memory I could have bought into MBL which was trading in $22-30 range and subsequently went to around $72. Mate we could go round in circles on this particular point.

While it may sound like diving in or out of stops, it was not meant to come across that way. But, systems such as T/T have no intelligence and are actually a buy and hold style approach and there is no scope for looking/taking better better opportunities. There is no obvious concept of risk/award, neither does it or the methodology appear to consider valid situations where a stock may go into a ranging or consolidation pattern. I think that we both are well aware that stocks can go either way depending how they come out of the any pattern.

I really don't need to use or consider discretionary techniques here, as an understanding of market behaviour can go a long way to assisting and building build a reliable system. Ignorance of market behaviour can be a limiting factor from a system design perspective.

If your talking of multiple chart based discretionary exits then consistant profit will be very difficult,as psychological factors will come into play.

NO, NO, NO, NO, not interested in this approach and agree with you on the psychological factors.

Cheers.

 

[tech/a]

Lesm.

Some nice stuff and contructive thought.
I will reply at length whan I have more time.
Just knocking off work now!!

I might say that I feel we are on the same page,Trades arent taken on positive expectancy alone,as I dont know from one trade to the next what that calculation may be---only that by sticking to the method the expectancy should(and has so far) return the expectancy of extensive testing.

Thanks for your input---yes we will also try and keep the risk issue focused but I feel that all aspects be at least discussed in brief as they are now.

Finally T/T isnt presented as "THE Trading model of models" it performs well but falls way short in my view to anything approaching perfection---still happy to trade it though. Any input as always with regard to the method which is an on going project with me is most welcome.

More later.

 

[It's Snake Pliskin]

Lesm good comments!

One of the biggest risks to a lot of traders is themselves.

This is one of the most accurate things I have read in this thread.

Beginners luck can also be a dangerous trap to fall into. This can lead to overconfidence and overtrading. It may also lead to trader carelessness as they start to overlook the risks until the market savages them severely. Especially, if they stop following their plan/methodolgy and the effective risk levels increases to a dangerously high level.

Beginners luck is detrimental to the future of any trader.

The market is a hard and unforgiving task master. Markets, such as the one we have at the moment can make traders careless and overconfident.

Let it prove you right sometimes. As one realises an opportunity to sell, there must be someone with the intent to buy what you do not want. If this is not the case then you are dogs breakfast.

The managment of the trade is what is critical, as this what makes or breaks any trade (winning or losing) and can save a lot of heartache. Brent Penfold in 'Trading the SPI' highlights this aspect, as part of what he refers to as the 'Holy Trinity'.

Very true.

 

[lesm]

Tech/a,

No problems, when you get the time.

Was concerned earlier that we may have inadvertently been on different pages.

Cheers,
lesm

 

[tech/a]

One of the biggest risks to a lot of traders is themselves.

One very good reason to have a sytem and blueprint to go by.

Available capital will always be a factor. How many trades could you have taken that you didn't that may have been more profitable than the ones siting in you current portfolio.

Montecarlo analysis tells me not many as the return is at the upper end of the 20000 portfolio tests.

Ignorance of market behaviour can be a limiting factor from a system design perspective.

This would be clearly shown in the inability to design one.

Back to risk.
Small losses to preserve capital and then get you out of a trade quick enough so that opportunity cost (from loss of time and money in a negative trade) is minimised.
By testing your stop preferably on 1000s of trades its efficiency can be measured and its placement determined.

My tests indicate 7-10% (From intial purchase price) being the most efficient,20% being the level that will less likely be stopped out.But the downside is profits deminish as many stocks languish between the 20% stop and the initial purchase price. (Needs a 40% increase in price from a 20% loss to reach the initial purchase price!).

The whole point in this discussion is that in the end,you have a Business that has an end result of profitability,rather than disjointed segments.

However I would like to touch on a point that Duc brings up quite often with regard to the psychlogy aspect of loss and trading.
This risk I feel can be limited by trading smaller parcel sizes and smaller portfolios. Undercapitalisation and overtrading in my view are the main causes of psychological swings and the inherent RISK of these important elements of Fear---bought about by Greed.

These factors of course can be used WITH those discussed above.