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

    45 vote(s)
  2. No

    107 vote(s)
  1. Buy1Sell2


    This is a fact. In order to be successful in trading, it doesn't matter whether you are right or wrong when placing a trade. What does matter is that when you are wrong, you lose a little bit and when you are right, you maximize your gains. Why do most traders (especially day traders) lose? They don't have prudent risk management skills. End of Story. Now, a lot of folks may say, "but the newbie trader doesn't know how to pick entries and exits". While that may be true for some, the real issue is that when they are wrong, they stay married to a position, or add to a position in order to not admit failure. Your best bet would be to learn to embrace failure, learn to shrug it off, learn to admit when wrong and learn to stay in trades that are winners. You see, Prudent Risk Management is not just about placing an initial stop---it's also about managing a winning trade. Remove the focus from high winning percentage. Retrain focus on losing a little and making a lot.
    KeLo, jamus, Traberry and 14 others like this.
  2. That's it man! It takes most about 10 years to figure that out.
  3. To use a Blackjack analogy (assuming optimum playing conditions):

    - EDGE is card counting (TIMING)
    - PRE-REQUISITE is money management (SIZING).
    In & of itself money management is NOT an edge

    (LOL this is why in the long term, betting (SIZING) on random blackjack hands with NO card counting is not profitable...regardless of how "good" your prudent money management system is)

    If "prudent money management" blabla is an edge in & of itself, you 5 lot pikers wouldn't be spending so much time on ENTRY (ie TIMING).
    You'd simply enter at random (coin flip) & let SIZING (money management) take care of the rest. None of you is doing this

    you also need TIMING (guessing right entry/direction).
    SIZING is a pre-requisite

    Yes, money management (with random entry or wrong guesses) might make your grubstake last longer.
    In the short term, might even be profitable (thru luck).
    But in the long term, eventually it will dwindle to ZERO.
    (there's also commissions & slippage)

    Permabears on ET have guessed (mostly) wrong (TIMING) since 2009 since they have a fixed bias of short short short, everything is overvalued.
    Multiple "2% stop loss" from wrong guesses will dwindle the a/c until you need a home run just to breakeven

    Last edited: Jul 6, 2015
  4. loyek590


    blackjack is a rational game which has efficient rules. The market can be totally irrational and inefficient. In blackjack, once 4 aces are turned there are no more. In the market, they can just keep turning aces longer than anybody thought was ever possible.
    K-Pia, jytrade, Spooz Top 2 and 3 others like this.
  5. Buy1Sell2


    This is a major part of the point. --prudent risk management dictates that it is prudent to stay in winning trades as they can continue to win ad nauseum.
    jytrade likes this.
  6. loyek590


    not that I know that much about blackjack. The only time I ever played it was when I was forced to on dealer's choice night and an ex con would always call it when it was his turn (to get him back in the game.)
  7. Buy1Sell2


    Yes--and many others never get to the point of realizing this and will fight the concept to the very end. (Of their money)
    jajuanm2 likes this.
  8. loyek590


    I don't know that much about winning trades, but I do know a loss if left unchecked can go ad nauseum on you, so I suppose a win could do the same thing in the opposite good way
    Buy1Sell2 likes this.
  9. Buy1Sell2


    Good observation in my view.
  10. loyek590


    I would say, prudent risk management is the foundation of trading. But hardly an edge. With perfect risk management over time you will lose on the spread and commish. As much as I hate to admit it, to make money in the market you really need to guess right.
    #10     Jul 6, 2015
    jeffbader and Autodidact like this.