Risk models

[Paul71]

Sweepy, isn't the underlying problem twofold when trying to tame risk:

A: Nobody knows what is going to happen next,

and

B: Risk and Reward are correlated.

If that were not the case everybody would be making 800% year with a 0,5% drawdown.

;-)

So, in real life, no reward without exposure to risk.

And the size of your reward depends on the amount of risk you are willing to expose yourself to.

And if that amount is causing you sleepless nights, wasn't it one of the Market Wizards who recommended to then reduce your risk to your sleep-well levels.

Nothing much new here at all, but I'd always run away very quickly if some whiz kids promise you the keys to the moon, great returns with minimal risks, well, we've just seen what happened to the likes of LTCM or more recently certain no more independently operating banks that thought they had that non-existing holy grail cracked, right ?

As for hedges, well, they may protect your downside, but again at the cost of eating into your upside, so really provide you with no more than a similar situation to if you'd just been smaller from the outset.

Outright trading with options, well, unlike with futures your worst case scenario is clearly defined, but can you trade in and out with them with equal ease, low costs and speed intraday like with futures ?

I may be wrong here, but from what I've seen I believe options are only really a viable alternative to futures for longer term stuff where at a bare minimum your holding period would be at least several days.

Can't rep you mate, good post. Call me neanderthall man, but i don't use complex risk models, for me it's just a visual thingy, with an ear or two for the squawk.

 

[Adamus]

PS, a good tool to play around with various risk / reward ratios and winning percentages too see where you'd end up with the various combinations, and what would fit your objectives and needs, keeping in mind that high hit rates where you go after small targets isn't very scalable.

Hold on a mo', why aren't high hit rate systems scalable? At what point do they break, and why? Are you talking about trying to place massive orders - in what markets?

In my mind, high hit rates are desirable because you can compound faster.

 

[BSD]

Adam, eventual liquidity issues. Very high hit rate strategies run into a glass ceiling pretty quickly.

Thats why guys at prop firms who do pretty short term stuff make excellent money, but can't really compound themselves up to tremendous wealth.

Not that that is necessary or needed of course, but just saying what the limitations of high hit rate are.

Or why hedge funds do not look for traders with non-scalable short term high hit rate styles:

http://www.trade2win.com/boards/loo...s-wanted-hedge-fund-capital-2.html#post487606

Or have a look at Marty Schwartz, tremendously successful Market Wizard and author of Pit Bull, made on average 30% / month on a NON-compounding basis for his own accounts, but failed when he tried to run money for Commodity Corps that was later bought by Goldman Sachs, or when he tried to launch his own hedge fund, because his very high hit rate style with 70, 80% winners going after small targets just didn't work with a large capital base.

 

[Adamus]

OK so you don't want to try it with NZ lamb's wool futures or the Rand/Peso cross. But surely in the euro/usd or the SNP or TBonds? Well OK, maybe not.

But on another tangent, if I'd made 30% a month working for myself, nothing would convince me to go and work for someone else again. Assuming I'd made enough money not to need to work again.

 

[BSD]

But on another tangent, if I'd made 30% a month working for myself, nothing would convince me to go and work for someone else again. Assuming I'd made enough money not to need to work again.

Oh, absolutely, I mean I hope nobody gets me wrong there, he made absolutely great money, no doubt about that whatsoever, and it was better for his health, too, ending his hedge fund adventure.

Btw, his own book (he was featured in Market Wizards as well) is a great, entertaining, superbly written and pretty funny, plus educational read, and he comes over as a super guy (hmm did I miss any eulogy there haha):

Amazon.com: Pit Bull: Lessons from Wall Street's Champion Day Trader: Martin Schwartz: Books

 

[Adamus]

I guess you missed the second review on that Amazon page - it says the book stinks! But I'll definitely pick it up and have a leaf thro it next time I'm in the book store.

The Market Wizards interview was good. He stated that he felt stale and needed a new challenge. I didn't occur to him that he had enough money to do anything (within reason). I guess the guy just doesn't have any other interests than trading!

 

[BSD]

I guess you missed the second review on that Amazon page - it says the book stinks!

Re his interests, loves horses and has adopted many, and he's into his art collection too apparently.

 

[blancspa]

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