Too what degree should risk be mitigated? If extreme low risk then yeah , it gets complicated for simple retail mind like mine and probably more risky as size is put on to further diversify and decrease risk. Correlations blow out and boom. Simply levering QQQ/SPY in 2015 or your AUD+NZD/USD+EUR (lately, really?), Or the 2yr/10yr treasury yield spread funded in JPY for the last few years are a couple examples of dozens of risk reducing measures small retail can afford to do in their IB accoumt. Challenge for me is measuring and underestimating the risk I really have.
Shouldn't be. For you to go on the risk, you need to have an "image of the profit potential". Then, "how much are you willing to risk that your perception is correct"? The "risk" is your "stop amount." K.I.S.S.
Specifically, with respective DV01 for 2yr and 10yr approx $30 and $60 (2)ZT and (1)ZN Purchased with (1)Usd.jpy sold , has a notional exposure above 600k. Easily put on with a 50k account but possibly too much risk of things go wrong.
I kind of prefer a Hybrid of the two... between conservative/minimizing risks institutional players...and the more aggressive directional retail accounts. ...That's like the Magic spot ops: -- if you are a skilled trader. If you are conservative, you'll get nowhere. If you are directional aggressive unhedged...you are gambling...and you know what happens to gamblers (in the long run).
No, No, No, No! I'm a schooled biologist with a life-long interest in snakes. A good trader should be like like a Gaboon Viper... motionless, camouflaged among the leaves.. patient... waiting for prey to come within striking distance... THEN STRIKE! (IOW... be patient until a favorable risk/reward setup.) That is... you study the markets and determine when the risk/reward in your favor. THEN, and only then, do you go on the risk. Over and over, rinse and repeat. In one of my best overall return years (>100% total return on capital), I was exposed to risk only about 23% of the time... the rest of the year I was safely in money market funds. Not saying it always works out that way, but that's a good "thought line" for an investor to have.
"Gambling"? Not necessarily. Depends upon whether you are "smart" and "experienced".... could be a "risk/reward" favorable play.
To clarify, you are long ZT and short ZN? BTW, you might enjoy this website http://www.curvetrades.com/index.php/market-data
I have no positon now. Recent flattening in 2015 and stable/sideways action recently. But, 2014 was an amazing year for steepening. The entire curve was deflationay in 2014 with bullish steepening at the fed end. Quite unexpected to me with all the hype in 2014 of the divergent US monetary policy..Ha!. The mechanics of the hypothetical trade i was referring to would have been long (2)ZT and short (1)ZN over/ Short (1) USD.JPY. So, (400k/200k). / 100k Approx for total notional exposure of aout 600k I dont know of any other way to measure the risk of this complex postion other than to net it all within excel and look for the worst case days over the last several years. This "position" has been a good proxy for risk due to both the long (yield spread) and the short Leg (j6) a central bank QE play. But, things can go wrong with both legs. Too bad threads can derail where it may be helpful to discuss risk measurment when taking on positions such as this for little retail guy.
Well, apologies as I misspoke in the last post. 2014 was a huge flattener year in the spread of the ten and two year US treasuries. Pretty clear in the following yield charts.
When I reviewed this year, I was astonished.... averaging nearly 2% PER DAY for risk exposure in mutual funds. Seems ridiculous. How can that be? Well, IT BE!.. And I wasn't trading with a "token $5K account"... it was with a "$Millions" account. (That wasn't my best year... If I recall it was ~108% return... my best was 144% return.) I didn't post this because I want any "atta boy" from ET'ers... but as an encouragement... that wherever you are in your development as a market trader... regardless whether or not you're struggling currently, "it's doable".