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


    Happy with the poll results (80% against) but really thought it would be more in the 90% or so range against. Prudent risk management is the only true edge in trading and I am not surprised to see the poll heavily skewed against the tenet as the largest bulk of traders end up losing money and never grasp this reality.
    #21     Jul 10, 2015
  2. Vindago


    IMHO I would say:
    1. absolute CONTROL of losing trades is a pre-requisite, until and unless this is achieved there is no chance to consistent profitability, however I also agree that this while necessary is not sufficient.
    2. once the pre-requisite is achieved, screen time, experience, understanding of the Milk (i.e. how the market operates) and thus ability to choose low risk entry point for trades is the final edge that allow for consistent profitability.
    The problem is that most traders attempt to achieve the second (it seems obvious, right?) without first and foremost achieving the first. Being able to identify low risk entry point for trades without absolute control of risk will never lead to profitable trading, IMHO...
    #22     Jul 11, 2015
    black_trader, Montbra and apdxyk like this.
  3. deaddog


    This theory of yours is easily proved. Start a Journal; call your trades in advance giving the time of the trade, the direction and the exits.

    You can use SPY as an example and see if you can out perform a buy and hold strategy.
    #23     Jul 11, 2015
  4. Saying is always easy! Isn't it?
    #24     Jul 12, 2015
  5. Vindago


    Hi OT, yes I unfortunately agree, I have the theory very clear it is the practice that is taking some time to implement. But at least I now have a clear path to follow even if knowing the path and walking it is not the same...
    #25     Jul 12, 2015
  6. i960


    Risk management is a GIVEN. It is not an edge in and of itself. Heck, position sizing based on setup expectancy is probably more of an edge than "prudent risk management."

    I can risk manage losers all day - doesn't mean it's profitable.
    #26     Jul 12, 2015
  7. Vindago


    yes, that's true, but...if you do not control your risk you will never be consistently profitable and if my experience is as common as I think it is, most traders will loose a lot of money before they figure out that controlling risk is mandatory and is a pre-requisite.
    #27     Jul 12, 2015
    trader99 likes this.
  8. d08


    If what OP says is true, he could easily demonstrate this by taking a strategy which has barely an edge and turn it very profitable ONLY by using money management techniques.
    But he will never do so as what he claims is false, entries are very important.

    For the record, I don't employ any money management and I'm profitable for years.
    #28     Jul 12, 2015
    kut2k2 likes this.
  9. kut2k2


    Let's review the Four Cardinal Rules of Trading, which I'm sure many of you fellow ETers learned as I did.

    Rule #1 - Trade with the Trend. This is the rule for entering a trade. No details are given but if you can successfully enter a market in the direction of an extant trend, your chances for success are much higher than trading against any extant trend.

    Rule #2 - Cut Losses Short. This is the first exit strategy. It is how you avoid big losses. Another way of saying this: "When you find yourself in a hole, stop digging."

    Rule #3 - Let Winnings Run. This is the second exit strategy. This is how you establish gains, which is every bit as desirable as minimizing losses.

    Rule #4 - Risk Management. This is just another term for Money Management. The first three rules are about timing (entry and exit strategies). This fourth rule is about sizing: how much to trade in order to maximize the gains established by the timing rules (aka your edge).

    So knowing when to enter and when to exit trades is your edge.

    And knowing how much to bet on your edge is money management.
    Last edited: Jul 12, 2015
    #29     Jul 12, 2015
  10. loyek590


    I think what OP is saying is that there is very little proof that most traders can guess any better than 50/50 what is going to happen. So give us all a random entry and let's see how we handle it. After you put it on you only have a few choices

    1. close it out and get flat

    2. close it out and take the other side

    3. add to it

    4. subtract from it

    or a combination of the above

    did I leave out anything?

    oh yeah, 5. Do nothing
    #30     Jul 12, 2015
    Traberry likes this.