Is it possible to reduce risk to zero?

Discussion in 'Strategy Building' started by Norm, Jul 25, 2006.

  1. Actually... the correct ** real life answer ** is YES.

    Assuming you are profitable at an acceptable level... then your only risk is the risk of ruin.

    volatility = annualized standard deviation

    ** Note: this analysis is APPROXIMATE **...
    Typical volatility of Dow Jones Industrials: 0.10 to 0.20
    Typical volatility of US 10 Year Note: 0.04 to 0.08

    One can construct a well hedged portfolio (I have one)...
    With volatility at low end of US 10 year note range... let's say 0.05
    That generates returns more than double that of the stock market.

    Such a hedge fund would have a Sharpe Ratio in the 3.0 to 4.0 range.

    Now where is the risk?
    Ruin is roughly 20 standard deviations away...
    An event less likely than being struck by lightening.

    For such a hedge fund market risk ceases to be relevant...
    Only external risks such as financial system stability, regulatory issues, fraud, nuclear war, revolution, plague...
    Are small, but real, risks.
    #11     Jul 31, 2006
  2. hans37


    Sage advice indeed,
    #12     Jul 31, 2006
  3. rjv27


    the problem with your question is that you are assuming that:

    1. after you get into the trade the price will move in your favor
    2. even if it does, that you will get a good fill on your stop-loss

    so my answer to your question is NO based on your assumptions.
    #13     Jul 31, 2006
  4. If you wish to have near 0 risk in every trade, arbitrage may be the answer. However I wonder if a retail or individual trader can compete with the institutional arbitragers.

    But if you don't look for a win in every trade but take a bunch of trades as 1 win/loss, the risk can be very small like near 0, so to speak, if you have very sound strategies and money management.

    Yes, you may have drawdown, but gains will eventually come up and eat up all your small losses, leaving handsome profits.

    And then you manage to find a good trading edge to defeat the market, winning can be a near sure thing to you. You may also say you've found a "near 0 risk" trading in this regard.
    #14     Jul 31, 2006
  5. I dont think arbitrage is 0 risk. They call it "picking pennies and dimes in front of the steamroller", for a reason... when things go wrong, they go WRONG.
    #15     Aug 1, 2006
  6. Darvas2


    Hi Norm,

    I think you are on the right track thinking wise.

    At the end of the bull market I was geting into stocks that were rocketing up---Ebay, Amazon etc. etc. (I liked them because they were moving away from my buy point very quickly). If the stock turned on me before I got a breakeven stop I cut the trade. (I was in some stocks for less than 45 seconds). If I got a breakeven stop then I turned off the computer and walked away. I then checked it every evening and used trailing stops to lock in a profit. Brain dead simple: When I lost, I lost $20---when I won, it was open ended. It worked very, very well.

    You might read How I Made $2,000,000 In The Stock Market and Wall Street, The Other Las Vegas by Nicolas Darvas. Also check out William O'Neil's CANSLIM ideas, though O'Neil suggests cutting a loss at 7%, (Darvas cut a lot of trades if it was down 1/8 point). Also read about trader named Dan Zanger.

    There is a great quote, which I will probably misquote, that says "It's not about winning or losing, it's about how much you make when you are right and how much you lose when you are wrong"---I think it was said by Soros.

    Hope the above is useful to you.

    #16     Aug 1, 2006
  7. Been there, done that.
    #17     Aug 1, 2006
  8. Check out this position trading risk management technique:

    The idea behind the technique is that "risk capital" is deployed via pyramidding to break off blocks of stock in a controlled risk manner. When you are successful, the risk to your "risk capital" goes to zero and you are left with a block of stock.
    #18     Aug 1, 2006
  9. no
    #19     Aug 1, 2006
  10. No it is not 0 risk.
    There're a lot other non-strategy reasons you may lose money, fat-finger, silly mistakes and so on. They are also risks.

    But it should be the safest (least risk or come close to no risk one) way to trade, if you care to win every trade.
    #20     Aug 2, 2006