Risk. What is it really?

Discussion in 'Risk Management' started by marketpugilists, Jun 5, 2021.

  1. Been pondering this for a while. Although it is well documented in freakonomics and other sources that our perception of risk is not good, those who actually perceive risk correctly are still not absolved from it. If we use the example of the stock market as a game were a few folks make a lot of money i.e. Jim Simmons, and most others lose money or break even, an axiom common denominator for all players is still the presence of risk. Regardless of Buffet's winning track record, he cannot be immune to risk because there simply is no free lunch. So here comes the innoculation cocktail conundrum of edge, technology, big money, psychology, and even illegal insider info that separates a few winners from the rest. But just because you are vaccinated/innoculated doesn't mean you can't get hit by a bus and die. So there must be something (or many things) that can bring Buffet and Simmons down although that something would probably bring everyone else down as well. You manage the micro risks within your control and hope the macro risks outside your control does not bite. If a true zombie apocalypse or an outer space asteroid that wiped away dinosars was about to hit, what good really will the doomsday prepper's risk management do? Reality never really plays out the way it looks in the movies. One could argue doomsday prepping will still count for something but I'm betting no one would care what your 20 year alpha or sharpe ratio is. It maybe took me much longer than others who might have come to the same conclusion earlier but if there is risk (seen or unseen) in everything we do, then risk must be our very existence. And on that note I have been at peace knowing that my existence itself is risk. Your thoughts?
  2. Tavurth


    Proper risk management is just swapping into the right universe at the right time.

    Risk management is highly based on personal confirmation biases.
    If you can change your confirmation biases with some small effort then you will likely be able to manage your risk well.

    This is why we see many books about `the psychology of trading`.

    In essence you don't need the books, you just need to study how to give yourself a confirmation bias which is in-line with the current universal setup, and hence the market.

    Or, you know, swap universes until you find one where your system works.
    beginner66 likes this.
  3. On the institutional level, portfolio returns are analyzed based on risk. Every contributing factor of a return is broken down and attributed to a risk factor. There are hundreds+ risk factors, such as interest rate risk, vol, time, etc. Depending on the strategy of the portfolio, some risk factors will be hedged and others are the source of your return.
    murray t turtle likes this.
  4. Handle123


    Risk can be extremely complicated or find ways to trade highly leaveraged instruments and no matter what happens you won't lose your house and family.
  5. kroxobor


    Risk is defined as probability multiplied by return of the outcome. Like the outcome where you lose 9K with P=0.01 looks to be worse than the outcome where you lose $150 with P=1, however this is where your perception of risk starts to weigh on your decisions, since 9000*0.01 < 150, i.e. first alternative is better.
    marketpugilists likes this.
  6. Risk management in trading is about taking the risk of losing money. The main thing is that the risk of losing money in trading is lower than the expectation of profit. This is what you need to build trading strategies on. And after that, do not think with your head, but exactly like a robot to follow its strategy.
    marketpugilists likes this.
  7. As for me, then the risk is the very chance of getting your profit in the deal, do you agree?
    marketpugilists likes this.
  8. mab81


    Risk is the level of probable losses you can make when you trade. There is always a possibility as you can never be completely certain of outcomes. But risk management is very important as while you cannot remove risk altogether you can contorl it and deal with it as best as you can. SO for example it is recommended to use a stop loss and avoid risking more than 2% per trade, or with highly volatile pairs.
    marketpugilists likes this.
  9. kroxobor


    Yeah the rule of thumb is to keep variance of your returns as low as possible while pursuing your profit targets. I stop trading when daily loss reaches 5%
    marketpugilists and Dr_Trade like this.
  10. Dr_Trade


    Keeping 5% risk to reward is the most appropriate way to go with trades. I too keep it no matter how much is the volume.
    #10     Aug 8, 2021
    marketpugilists likes this.