BarroMetrics Views: Risk Management
Whenever I am asked to answer a question, I first seek to understand the outcome being sought by the inquirer. In this case, I have assumed that Baz, Manish and Paul seek to improve their trading profits.
So, let me begin by first identifying what is required for trading success:
- Mind: (winning psychology) which I define as the processes that lead to the consistent execution of our trading plan’s rules and our money management’s rules.
- Money: (money management rules) which I define as the process of balancing risk of ruin with optimization of profitability. It’s important here to understand that to make money we have to embrace risk. We risk enough to provide a probability of securing an adequate return. What is ‘adequate’ will be dependent upon our psychological make-up, knowledge and skill. Moreover, ‘adequate’ will change over time. For example: if you have never made money from the markets, expecting a return of 25% for 2014 is probably unreasonable. On the other hand, if you have been making consistently 20%, then a target of 25% for 2014 would be doable and adequate.
- Method: (trading method and trading rules) which I define as the processes by which we determine when the probabilities favour a trade and when they don’t. Different methods will suit different personalities e.g. a discretionary versus a mechanical trader, a visual (chartist) versus a digital (numbers orientated like Robert Hanna) trader etc.
I’ll look to answering the questions posed Baz, Manish and Paul from the perspective of Risk Management. This is made up of trade management and money management. I’ll start with Paul’s questions tomorrow, and then proceed to those posed by Baz and Manish.
Attached are snapshots of the questions.