Prudent Risk Management Is The Only True Edge In TRADING

Discussion in 'Risk Management' started by Buy1Sell2, Jul 6, 2015.

Is Prudent Risk Management the only true edge in trading?

  1. Yes

    53 vote(s)
    29.9%
  2. No

    124 vote(s)
    70.1%
  1. Fonz

    Fonz

    Prudent risk management is perhaps not just about flipping coins or placing 5% stops and 10% targets. That could be a little more complex than that.
    I have few different brokers, just in case (remember MF Global, PFGBest, Alapari UK...) The 1st goal should be preserving capital. After few interesting backtests, I always paper trade ideas for months before risking any small percentage of my trading capital. My 2nd goal is to make money with consistency (no big DD). And I never have any home run. My 3rd goal is 0 losing month. I monitor my trades, losses, profits, DD, Equity curve, about everything that I can.
     
    #311     Apr 4, 2016
  2. I Know You

    I Know You

    Trading binary options is against prudent risk management, because the strategy is flawed. Risk 100 & win 80. I have been pestered recently by a broker (yeah right) from 24option, he kept telling me that binary option "investment" offers amazing ROI 80%! That's how they sell this crap nowadays, all they have to say to folks is amazing ROI of 80% and no mention that risk is 100%.
     
    #312     Apr 11, 2016
  3. This may also be psychological issue, but we must try to limit our downside on a losing day or after a losing trade plus once in a winning trade we have to have the patience for the trade to reach our profit target unless we set an unrealistic target.

    For example, let's say you take normally 1 winning trade in the morning then stop. If the next day you have a losing trade in the morning, and you then look for another trade to try to make back the loss, you have altered your normal trading pattern and increased the risk that of turning a losing day into larger loss than you normal winning days.

    On the other hand, let's say you just had a winning trade, you could then wait a bit for another setup, and take another trade. If this trade is a win, you could based on your trading plan then quit the day with 2 winning trades but if the 1st trade was a loss just quit the day. So then that prevents 2 losing trade and instead you have the possibility of 2 winning trades. Now if the 2nd trade is a loss, you will instead have just a break even day for that day. Yes you gave back you win for the 1st trade but your goal was 2 winning trades which is very possible if your statistical win % is say 65% or higher on equal risk vs reward when you follow your rules and wait for a valid trade setup.

    Obviously, some of you are also able to just take every valid trade setup that occurs either through being very good at recognizing them or having programmed the trade setups to activate automatically. I would say this is harder for me especially after a losing trade so I am trying to use a trading plan that would prevent me from taking a big loss for the day compared to my winning days.

    Now once you are seeing positive results in your trading, you can choose to scale in one of 2 possible ways. Either do more contracts each trade with an equal risk vs reward, or have 1 contract set to go for a higher amount of profit. Today looking at the charts it would be better if I just did more contracts with equal risk vs reward. Now a higher win % means you are looking for an equal risk vs reward. A lower win % closer to 50% means you need to have a greater target than stop. The benefit of a higher win % is of course lower commission cost.
     
    #313     Apr 26, 2016
    dartmus likes this.
  4. What is the benefit of having an edge if you cannot trade it? Personally, Edge and prudent risk Management are all equally important.
     
    #314     Nov 3, 2016
  5. The problem is not trading the edge, the problem is having the patience to wait for a profitable setup rather than getting bored and taking a non edge setup. An edge is just a trade setup that you have written down in your rules of trading document not to be confused with a trading journal.

    For example, it may as simple as the stoch or rsi turning up from the bottom or based on an engulfing green candle giving you a signal to go long. It could be a break of a downward channel leading you to determine that the trend has reversed.

    Prudent risk management is then how you manage the trade. For example, say a break of a channel, your stop could be at a candle support under the original break. The target could be equal to your stop amount or it could be set to reach the next resistance level.

    The reason why some of these trades work is that price begins to hit trailing stops of the shorts that were following the previous downward channel and get stopped out creating more momentum to the upside.

    Many times instead of reading news stories on why the market is going up or down, or what it will do in the future, just examine the price action as it relates to the time of day and time frame that you choose to trade.

    If you don't find a profitable setup ie an edge then yes, you should not trade since just using prudent risk management will not make you profitable. Risk management is to prevent a losing trade from creating a big loss.

     
    #315     Nov 3, 2016
    Bobby Jay and profitlocker like this.
  6. Buy1Sell2

    Buy1Sell2

    Here is what happens-- The trader uses high margin compared to their TLNW. They have a few wins and begin trading more contracts as they win. Then , catastrophe strikes and they are wiped out. However, the trader who manages risk effectively by looking at the full picture stays in the game during the down event, loses a smaller percentage and starts winning again. In addition, the trader utilizing analysis of full contract value in calculations, is less inclined to get anxious and make desperate or stupid moves. The only edge a trader has is risk management. Every entry /exit method is known to all traders---it is just the ability to manage those entries and exits prudently that is an edge to a trade
     
    #316     Nov 5, 2016
    .sigma and dealmaker like this.
  7. I don't find this to be true. It's recognizing hidden areas of S/R that seperates the best traders from mediocre ones. Non-conventional wisdom will put you ahead of the crowd.
     
    #317     Nov 5, 2016
  8. Handle123

    Handle123

    I find this to not to be true, our brains are not a Roulette wheel unless you on some type of drugs, brains are trained by itself and always looking for patterns. For what you believe are hidden, other have identified them and they are just waiting for them to develop. For every single pattern there is, I have well defined rules. When you have a "Pivot high", how many rules do you have for it to be a Pivot High? And if you can't have well defined instructions on a Pivot high-you can't program it.

    There is profitable traders which I am glad is much smaller amount to losing trading which is huge amount. Think is terms of general population of being sheep, they follow each other, bell rings and like hundreds of times before they walk to ringing bell to get feed, just like so many traders who read books or even worse youtube and think that is how it is done, it is not. Books and youtubes have an end, they didn't add the extra chapters to show how to profit, if most authors knew how to trade, they would not be writing books or wasting time doing youtubes.

    Profitable traders just gone beyond and always have an open mind, whatever general population of traders think is dumb way to do something or it too small amount to trade or staying in a position for years or seconds, they mostly likely always be sheep. People bitch about HFT or automation traders, Scalpers or program trading or arbing, remember these are adding to liquidity to markets and they are providing most of the volume to the markets, small traders are small and will stay small with their small thinking.

    When I started trading I wiped out dozen of small accounts, I learned how to program, tossed almost all the books into storage, kept S/R and pattern books, then backtest my weekends away. I learned from my profitable trades the most, don't care much about losing trades, time is one of many "edges", and learn to risk as close to free as possible, learn to enjoy many plus one tick trades. Growing up American is not to make the most you can on each trade, it is to make money each day or close to it even if it is just five bucks. You fight to get to breakeven, a day is like hourglass, if in the hole in morning, half day goes by and you come back to even, stop and pat yourself on the back, you concentrate on your capital, this is a business.
     
    #318     Nov 6, 2016
    Simples likes this.
  9. Zodiac4u

    Zodiac4u

    How can you gain experience if you can't control your spending? Prudent risk management is just one piece of the edge.
     
    #319     Nov 10, 2016
  10. MrScalper

    MrScalper

    What do you consider to be an edge?
     
    #320     Nov 14, 2016