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It's nice if risk can be quantified.

It's about the probabilities of something happening. What is the probability that I will lose money on the next trade, over the next year, or over the next 100 or 1000 trades? How would a strategy have performed over the last 10 years.

If a strategy failed in the past then the strategy is highly unlikely to perform in the future.

For me measuring risk, or determining the probabilities of success is about;

1. determining if the strategies I am considering using are likely to be profitable. I can really only do this through testing.

2. Finding a strategy (or range of strategies) that have worked in the past, in out of sample testing, and eventually in actual trading.

3. determining a position sizing approach to capitalise on the strategy.

4. Monitoring results going forward.

5. Milking the strategy for all I can get given my trading business goals.

Where is the risk if you have done your homework properly? Thousands of hours testing and retesting strategies, analysing results, throwing out months of work because it doesn't make the grade, to come up with an approach to the market that tilts the probabilities of success very strongly (at the 99.95% significance level) in my favour.

What are the probabilities of failure if you don't do your homework?

stevo

http://drawdown.blogspot.com/