Good day, everyone! Hope you’re all doing well as we look to get things going in the session ahead. It’s been a tug of war in the battle of risk since trading yesterday as markets are once again now appearing to shrug off fears concerning the coronavirus outbreak.
Archives of “IT” tag
rssA Common Misconception
We’ve all heard it before: You just need more winning trades than losing trades in order to be profitable….
Wrong.
There’s a common misconception out there that more winners than losers automatically results in a profitable account. I personally don’t think that’s the case at all. In fact, the more important thing to worry about is how big those losers are relative to your winners. You can have more winners than losers but have your losers result in massive drawdowns that your winners can’t make up for. I can’t begin to tell you how many horror stories I’ve heard about just 1 or 2 trades completely ruining a portfolio filled with all these other winners. So to me, I believe that as long as you keep your losers small, you can have plenty of them and still keep an extremely profitable account.
And this really just plays into the importance of risk management. I know I harp on this a lot, but it’s so true. The only thing that matters is managing your risk. I don’t care how you come to your conclusions. It’s irrelevant. And I get nasty emails sometimes from people disagreeing with my methodology. But the truth is, who cares how we come to our conclusions? Balance sheets, income statements or lunar cycles – it doesn’t matter to me. I just want to know where we’re wrong. At what price is the original thesis incorrect? And therefore, how much are we risking to put on this position? (more…)
THE VERY SUCCESSFUL TRADERS
The very successful traders I’ve known are very aggressive. When they’re right, they press their advantage. They add to good positions or keep re-entering in the direction of their idea as long as nothing is proving them wrong. “No one ever went broke taking a profit” is not how the best traders operate. What Dr. Kiev was saying was get out of losing ideas quickly, but really milk the winners. A good trade is valid until proven wrong. Just a few more big winners make a big performance difference by the end of a year. Risk management is not just cutting losers short; it’s also ensuring that the average size of your winners handily outstrips that of the losers.
Do Losers Average Losers
Do losers average losers?
Averaging down is usually compounding your loss had been my experience.
Or, throwing good money after bad money.
Averaging in or out looks a lot like hedging/scalping the gamma of an options position. Counter trend if you’re short, trend following if your long.
How you amend your position with respect to some factor (be it equity, time, what-have-you) is imho the next frontier, and the most productive, to-date, endeavor in portfolio management (and little understood because people had not crafted the tools to study it).
Adding to losing positions is portfolio insurance in reverse. The points bad of portfolio insurance, are points good now in this exercise and vice versa. There is an enormous, fertile, ocean-sized domain to be explored and exploited here, and there is the opportunity to step beyond mere aphorisms in this regard.
Ralph, as I understand what he does is the worlds master of averaging positions—but not for short term trades—only trades where he knows the position will show a profit…unlike we short term traders that often buy at all time highs, etc.