Personal Risk Management

Personal Risk Management

One of the main issues holding back traders from making a large advance into their trading ability is they may lack the ability to understand and accept the difference between money and price, as they pertain to trading. Especially when it pertains to risk management.

Personal Risk Management is about money something a price based systems does not care about.

These are the open positions profits going into a weekend. As a matter of choice and based on sound risk management I choose not to hold these positions over the week end. Full stop.

Some may be taken back by this thinking that, if the system is long, well I should remain long and hold the position, which I have no confidence in the system. Or they may think that the backtest supports the long term out come to be profitable, and I should hold; I may be missing a great opportunity if I get out.

Or worse yet they may think in terms on the added cost and or work of lifting the options oat the market on the close and getting back in manually on the reopen Sunday . Or what about the slippage!?

I read this way of think in the LinkedIn groups and forums and my line of thinking gets a deaf ear.

Risk management is just that avoidance of risk and holding over a week end entails risk. It is not like holding overnight anymore when you just 35 minuqtes of no market to exit into. We are talking about days in which a news event of unpredictable proportions can occur, like the jerks at the S&P credit rating service can lower the rating of US bonds.

Never the less to make a point by extreme is to make the point eagerly, too many traders think that trading with discipline is taking all the trade all the time, it’s not. A good trader has OBJECTIVE rules of engagement that he lives by, one is not to create risk when it can be controlled.

So I exit all positions on Friday at the close and re-enter on Sundays open. I have personal rules of how much negative spillage cost I am will to accept on the re-entry and obviously if the open exits on the reopen I do not enter the trade.

Over the years this is one the of soundest risk management rules to have and a good example of the different between a price based systems and a risk management systems.

Account size matters.

When a trader has a number of good market strategies putting together the portfolio is one issue, what they call conflicting positive choices. But once you have a method to select the market strategy, how do you capitalize it?

A questions I have asked myself in terms of risk management is who does the best job of covering their ass from loss. Banks and Brokers do,

Without getting into deal desk and market making operations, they know how to calculate margin requirement.  Their goal is to insure that they have clients account capitalized enough that if they hit a loser, the broker is not left with an "unsecured debit."

So even for day trading, I use the so called overnight margin as my account size for a single lot.

I have mentioned before that diversification isn’t what it used to be. The lead lag cycles have condensed into moments compared to 20 years ago, before we had e markets and instant communications and data.

It’s not bonds to stocks to commodities back to bonds to shocks to commodities before the flow of funds starts all over again.

Today the flow of funds in condensed into the Moment and what we see in the Technical Event Model is the market conditions for many diverse markets being in gear.  So it is not a surprise to hear that system traders all had a bad period or that the "Managed Funds Report of CTA's comes out and they all had a bad or a good period.

The point is that the context changes with the flow of funds and context changes, the hell with directions, we can make money on either side.

These impacts account side as the reports that show a max DD for five market systems at 15k should not be projected into the future or used as the basis of your account size.

If you are trading five markets, one lot each, use the broker's margin requirement, as they know two to protect them else against risk.

We are all undercapitalized for the goals we want to achieve, and this idea of over capitalizing may not sit well with day traders.  But with the amount of leverage and the kinds of returns we can achieve n futures, you don't need to be undercapitalized.

Lastly, the idea behind the Technical Event Model is to use the same method as Soros and others when it comes to risk management. They control risk by staying out of the market when the conditions are not favorable.

Where this breaks down

• [Draft , Jack to add failure modes and conditions under which this framework breaks down]