Registered User
Joined: 12/8/2004
Posts: 1,301
|
Your initial risk is the only thing you can control when investing. That's it. It's the only thing. We all use technical analysis to try and figure where a stock or market is going, but we cannot control where it is going. The market does not consult us before it goes up or down. It does whatever it darn well pleases for whatever reason somebody on CNBC or the WSJ says, and they don't know either.
The risk is set by your entry, and your stop loss order. Anything that happens after that is 100% out of your control.
|
|
Registered User
Joined: 12/18/2004
Posts: 180
|
QUOTE (HaveNoCents) Your initial risk is the only thing you can control when investing. That's it. It's the only thing. We all use technical analysis to try and figure where a stock or market is going, but we cannot control where it is going. The market does not consult us before it goes up or down. It does whatever it darn well pleases for whatever reason somebody on CNBC or the WSJ says, and they don't know either.
The risk is set by your entry, and your stop loss order. Anything that happens after that is 100% out of your control.
True for the most part, I would say. You still can't totally control your risk--you can only try. You forgot to mention that you can also attempt to control how much of your profit you give back once you are ahead.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
I would just addd, that when you change your stop, the MARKET caused you to change your stop. You are adjusting to the market movement of which you have no control. Your initial risk and percentage of your portfolio you use per trade should not change. Your number of trades may change, but that is totally up you, not the market. So again, your inital risk is the only thing you have complete control regardless of market. You actually are completely controlling your risk because you set the amount you can lose per trade.
|
|
Registered User
Joined: 10/7/2004
Posts: 264
|
I don't think that you can even control your risk all the time. What about an instance when the stock gaps through you stop loss and you are out at a much different price than you planned on? That is why you need good money management. Good luck.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
Good point, but if you set your stop for extended hours trading it will probably be hit.
|
|
Registered User
Joined: 8/30/2005
Posts: 29
|
you seem a little negative today.
|
|
Registered User
Joined: 1/28/2006
Posts: 291
|
What an interesting question.
My answer would be 'You'. Self control and self knowledge are the only tools against self doubt (the little death, the shadow of the valley of death - depending on cultures).
To my mind this is critical if one is to trade.
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
awshucks
quote:"My answer would be 'You'."
Excellent point awshucks.
$1 invested in the market is $1 worth of risk. that equation will never change.
The things we do control:
Knowledge
Discipline
Analysis
Tolerance
Even though we perceive it differently. A gambler who places a $10,000 bet for
RED on a roulette wheel and one who places a $5 bet, have the exact same
RISK/REWARD profile.
As I see it. The problem with the HNC statement is it removes responsibility
from the equation.
Thanks
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
QUOTE (diceman)
Even though we perceive it differently. A gambler who places a $10,000 bet for
RED on a roulette wheel and one who places a $5 bet, have the exact same
RISK/REWARD profile.
As I see it. The problem with the HNC statement is it removes responsibility
from the equation.
Thanks
Responsiblity is too general. Is it responsble to risk 10,000 when you only have 20,000 to your name? I don't think so, perhaps some do. This is why risk as a percentage of your account is so import, and that percentage should be small. This coupled with position sizing is the total key to consistent success.
I mentioned a study in our last discussion. 95% of people had less in their accounts than what they started with and they were guaranteed a 60% win ratio. The only thing they had to do was determine how much to risk each time. That should certainly tell you something. It certainly tells me something.
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
quote:"Responsibility is too general. Is it responsible to risk 10,000 when you only have 20,000 to your name?"
HNC
You are talking about responsibility as it relates only to wealth/bankroll.
I was talking about responsibility as it relates to all the things a trader
is responsible for.
Things like:
developing a trading plan
learning about technical indicators
learning market history
choosing a trading timeframe
analyzing our trading mistakes
controlling our emotions
learning what separates a good stock from a bad one
learning what type of trading we feel comfortable with
learning about economic indicators
and so on.
The way I see it we "choose" our risk. (not control)
We actually "control" the list above.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
QUOTE (diceman) Things like:
developing a trading plan
learning about technical indicators
learning market history
choosing a trading timeframe
analyzing our trading mistakes
controlling our emotions
learning what separates a good stock from a bad one
learning what type of trading we feel comfortable with
learning about economic indicators
and so on.
The way I see it we "choose" our risk. (not control)
We actually "control" the list above.
I agree with everything you just said with the exception of "choose" instead of "control". It may be a choice, but if it is not controlled (and you can control it), you will run out of money.
You may "choose" to bet 10,000 a hand on black jack when you only have 20,000. Needless to say, the odds are you will go home broke. If you "controlled" your risk you would not bet that much of your bankroll.
|
|
Registered User
Joined: 12/25/2004
Posts: 51
|
As risk is constantly re-evalutated by trader or invester I believe best statement of what one can control is:
One may at any moment accept or reject as satisfactory or unsatisfactory the apparent odds of achieving the outcome foreseen.
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
quote:"You may "choose" to bet 10,000 a hand on black jack when you only have 20,000. Needless to say, the odds are you will go home broke. If you "controlled" your risk you would not bet that much of your bankroll."
I think bet risk and risk of ruin are two separate issues. I think the gambler
can control his time in the casino. ( the ultimate control would be to not
make a bet at all---very hard---not practical in real world) but that is his
choice.
However I don't think he has changed his risk equation. $1 bet = $1 risk.
We can choose to bet less because we fear leaving early. We can choose
to put half our IRA in bonds because we fear a bear market. While it appears
we are controlling risk , all we have really done is avoid it.
The bottom line is $1 bet in a casino or invested is $1 of risk I don't think
that can ever change.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
All I can say is do a google on "van K. tharp" or Tom Basso. They have already done these studies that we are discussing right now.
Controlling risk is not avoiding risk. The risk is still there. Risk always has to be compared to reward. Even when the odds are stacked in your favor there will still be 95% of the people losing money. The studies have already been done. Read them.
|
|
Registered User
Joined: 1/28/2006
Posts: 291
|
As I alluded to on another thread within the last day or two, the issue of 'mitigating risk' is a form of establishing ones own comfort level on the market rather than broadening ones comfort level to accept the market.
In the long term this would tend to limit your growth.
The key, as I see it, is to balance portfolio exposure with slight discomfort at all times. Note I do not support rash extremes!!!
To expand, we have to push gently on boundaries...or the old channels remain in place.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
I agree, and disagree. Yes, you need to have a comfort level. I have a great comfort level right now, but I have still made the decision that I will no longer risk more than .5 of my account value. Why? Because I am not GOD. I might think I know where a stock is going, and I may be right more than I am wrong, but if I take a chance on something that is wrong I pay too large of a penalty.
My goal to use "my gut" on a trade and risk more. My goal has always been to take my gut out of the trade.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
Sorry, I cannot get my fingers to type what is in my mind.
My goal is not to use my gut on a trade and risk more.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
A very wise man once wrote
QUOTEThe biggest Problem I see with traders is that they only see markets; they don’t see Risk vs. Rewards.
Traders should view every trade as a 2% risk and be totally indifferent to any market they trade.
In other words, what’s the difference between the S&P 500 and GOLD?
Nothing, they are both 2% trades.
Now you see how opinions get in the way.
You are only fooling yourself if you think you know which trades are going to work before you take them.
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
quote:"All I can say is do a google on "van K. tharp" or Tom Basso. They have already done these studies that we are discussing right now."
In the Tom Basso study he had a 2% risk system vs. a group of
professional traders and a group of AAII investors.
Theses are the results :
Pros: win= 12.21%
avg drawdown=10.35
avg. reward to risk=1.36
AAII win= 60.53%
avg drawdown=28.94%
avg. reward to risk=3.59
2% SYS: win= 5.9%
avg drawdown=3.96%
avg. reward to risk=1.49
This proves my point. The AAII investors beat the 2% system by a factor
of 10. They chose to take more risk so they had more reward.
The Pros beat the 2% risk system by 2 to 1.
The less volatile results of the 2% system came at a cost.
Sure the AAII investors had more volatile results but I would think
that would be expected based on their returns.
I would bet that if you tested these results on thousands of investors
and plotted it on an XY graph it would be a perfect line of more risk
more reward, less risk less reward.
What I don't like about these risk equations is they seem to imply that
you can have high reward with low risk. If you choose to change your
risk profile you will change something else like reward.
$1 bet will be $1 risk. I don't think that can ever change.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
YOU MISSED THE WHOLE POINT OF THAT STUDY!!!! It was risk vs reward, not 2%, that won the study.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
the 2% people had an average of 1.49 reward vs risk. If they would have selected stocks with a higher reward to risk they WOULD HAVE WON. The study shows you can be a complete idiot, and still be in the game.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
Steve Griffiths explains it best.
QUOTE
Most traders stumble along blindly making profits and losses but have no idea what they actually mean.
Let’s look at an example. Let’s assume that you have just made a profit of $800 on your last trade. Do you have any idea how “good” this profit is ? To you, $800 is just that - $800. But what about if you had had to risk $1,000 to get that profit or…even worse…if your last loss was $1,000….. Now you are in the situation where you have large losses and small profits. I am sure I don’t have to explain to you that this is not a sustainable situation and that this is the path to financial ruin.
OK, now let’s assume you have read this help file and understand that you need to use position sizing to keep your losses small and, more importantly, in direct relationship to your profits. So let’s assume that you still made your $800 profit but you only had to risk $200 to achieve this…or, put another way, your last loss was only $200.
Can you see the immediate difference here to your long-term profits and losses? Only now are your profits large in relation to your losses. I hope you can see that having large profits and small losses is far more sensible and is the way forward to make money over time.
This is what position sizing is all about – a way to keep a constant risk per trade so when your profits come through they are large but, critically, large in direct relationship to your losses.
This is the real Holy Grail of trading and is misunderstood and misapplied by the vast majority of traders.
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
quote:"Let’s look at an example. Let’s assume that you have just made a profit of $800 on your last trade. Do you have any idea how “good” this profit is ? To you, $800 is just that - $800. But what about if you had had to risk $1,000 to get that profit or…even worse…if your last loss was $1,000….. Now you are in the situation where you have large losses and small profits. I am sure I don’t have to explain to you that this is not a sustainable situation and that this is the path to financial ruin.
quote:"OK, now let’s assume you have read this help file and understand that you need to use position sizing to keep your losses small and, more importantly, in direct relationship to your profits. So let’s assume that you still made your $800 profit but you only had to risk $200 to achieve this…or, put another way, your last loss was only $200."
I think this statement is ridicules. He starts out with a situation of $1000
of risk and the position is sold for a $800 profit. Then he says it would
be better to have $200 risk and $800 reward. One problem he doesn't show
how its done.
Lets say I have a $40 stock I want to buy and I want a stop at $37.
$1000 risk/3= 333 shares. If we state that I made $800 on the trade
then I sold at 42.4. 2.4*333=$800 profit. A 6% stock gain.
Now I want to "control" my risk. After all everyone knows a $200
loss is better then $1000.
So under the same conditions
200risk/3=67 shares. OOOPS I see a problem already. In order to
make an $800 profit. The stock needs to go to 51.94 for a 29.85%
gain.
11.94*67=$800
I think it was his choice to keep it verbal and not show any examples.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
I give up again. You look at every trade as if you will win. If you can win every trade YOUR SYSTEM IS THE BEST. If you don't, position sizing will help it. You can choose to believe it or not. It has no effect on the money I make.
I used to trade exactly like you do. I WAS, AND STILL AM SUCCESSFUL. I believe I will be even more successful using this strategy. It is backed by studies, and MOST OF ALL,IT MAKES SENSE!!!!
|
|
Registered User
Joined: 1/28/2005
Posts: 6,049
|
HNC
Realize I'm not trying to be a hard head but I feel a responsibility
(especially to new traders) to speak and defend the truth. To try and
look at suspicious claims with doubt. I'm sure you've seen the ads on TV
" I made $66,000 trading stocks in my spare time."
You have to remember people like Tharp and Griffiths are selling
books. They have a profit motive to make the investor think they
can offer him something.
I would love to be proven wrong. I would consider it a learning experience.
Because if learned something new I would be able to use it myself.
But when you have a guy like Griffiths magically change his risk reward
from .8 to 1 to 4 to 1(800/1000 to 800/200) I ask my self how can that be?
How do you take 20% of the risk but keep your reward the same. The
guy is either loose with the facts or dishonest.
I come from the school of thought that this is work and will always be work.I
think these items(and many more that I couldn't think of off the top of my head) from my previous post are the types of things that lead
to success.
developing a trading plan
learning about technical indicators
learning market history
choosing a trading timeframe
analyzing our trading mistakes
controlling our emotions
learning what separates a good stock from a bad one
learning what type of trading we feel comfortable with
learning about economic indicators
and so on.
As far as I'm concerned there is no magic "risk" equation that gives you
all good and none of the bad.
If you feel this portfolio equation risk is good for you then by all means use it.
All I'm trying to do is show what the possible drawbacks are.
All I can say is I hope it works for you.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
My concern for new traders is the ONLY reason why I keep discussing this. 95% of them will fail without proper money management. I too was successful without using the 2% system. I have averaged over 18.9 gains in my stock portfolio for 6 consectutive years. I mentioned previously I would buy 10,000 of every stock I considered. I always did look at risk reward, but as long as it met my 2-1 ratio, I put the same amount of money into every stock. Luckily, I came out ok, but the reason is more likely due to the fact that I was never anywhere close to fully invested, and I did a good job of pyramiding my winners on pullbacks.
I also made sure that I stayed away from all stocks under 10.00. Sure I had a few investments in some, but they were always less than 5% of all trades I did make.
Todays beginning investor literally HANGS in the 1-5 dollar stock area. This area is risky enough, but it is financial suicide to trade without proper money management techniques.
|
|
Registered User
Joined: 1/28/2006
Posts: 291
|
Quote HNC...
"I agree, and disagree. Yes, you need to have a comfort level. I have a great comfort level right now, but I have still made the decision that I will no longer risk more than .5 of my account value. Why? Because I am not GOD. I might think I know where a stock is going, and I may be right more than I am wrong, but if I take a chance on something that is wrong I pay too large of a penalty.
My goal to use "my gut" on a trade and risk more. My goal has always been to take my gut out of the trade."
I look at things a little differently. There is a large probability that ones forecasting techniques won't work on any given issue. Therefore, the only thing that actually mitigates risk is stop loss, not position size. I view position size as a subjective vote on strength of trend, not how risky trading is.
|
|
Registered User
Joined: 12/8/2004
Posts: 1,301
|
QUOTE (awshucks) I view position size as a subjective vote on strength of trend, not how risky trading is.
Believe it or not, I think you just made my argument with me without knowing it. If position size is a "subjective vote on the strength of a trend", and we cannot be certain which trades will work or not, why would you want to risk more on something that where you could not guarantee results? At least by using position sizing you give "no stock" more importance than another. Let's face it, we all think the stocks we pick are going to go in the direction we expect them to. Yet, 95% of the people are not succussful even when they are guaranteed to be right 60% of the time(study which was done).
If you win 60% of the time and still lose money you are either investing too much money in some stocks, or you are investing in stocks with a low reward vs risk ratio. Position sizing coupled with reward/risk analysis guarantees that if you can pick 60% winners you will indeed win. Yes choosing stops is very important, but given the same stop levels with one person using position sizing and the other not, 95% of the ones not using postion sizing will fail.
|
|
Registered User
Joined: 1/28/2006
Posts: 291
|
Our problem is probably more 'semantics'. Reversing your contention, I can have only a 30% win to loss ratio and be money up on the game so long as I pull the trigger whenever my rules are supported or violated.
I can be 'all in' on a single issue and still maintain limited losses. Some can't hack that level of 'commitment'. (Of course, there has to be a fast, strong trend to support such a position.) Is that 'riskier' than placing .5% in several different issues? I don't know. Death by a thousand cuts comes to mind.
Rely on a study to prove validity? Ha! Lies, damn lies, and statistics. The only viable yardstick is...does it work for you? You are not a smoothed average. If it doesn't work, chuck it and try something else. Different markets (fast, slow, mixed) and different generals (day, swing, long term) call for different tactics...much as on the battlefield.
As Clavell wrote and I paraphrase...you never bet everything on one role of the dice, except for those few times you do.
Those other times, one can use Kelly.
Finally, trading with your gut is the art form of trading, and it has its place as well. The fact is that 95% of the population will never be exceedingly wealthy...and 'position sizing' isn't the culprit. Lazy of thought and deed, and afraid to act. Thats why 95% of the people use 'professionals' who 'act' in their stead.
|
|
|
Guest-1 |