Risk Management

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:

  1. 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.
  2. 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. 
  3. 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.







6 thoughts on “Risk Management”

  1. Hi Ray, What i was trying to do was, based on my observations of the forex market data, define a clear set of trading plans. Prima Facie ,it had a high win rate. To evaluate the data using Expectancy Formula to avoid Murphy s Law.
    Also to use the process as an introspection so as to tighten up any sloppy habits that may creep in. A Renaissance.
    cheers Baz the Inquirer

  2. Hi Baz

    I see. You are after plan creation guidelines.

    Thanks for clarifying. I’ll start with your question tomorrow.

  3. Thanks Ray, Im not wishing to monopolize your time but in a recent video of yours about the statistics of a brokers report, it was a real eye opener and caused me to reappraise my own habits.
    I was blown away by the stats you presented.
    thanks again cheers Baz

  4. hi Ray,
    1. Just like your mentor Peter traded without stop-loss, my basic question is
    “Can we make consistent profits without using stop-loss?”

    2. Fund Managers advise clients to “Buy and Hold”, with average-costing strategy.

    This is investing/trading without stop-loss.

    Does it work consistently?

    3. What should be the Money Management to trade without stop-loss?

  5. Dear Ray,

    Sorry for vanishing for some time. Your observations on deliberate practice changed the way i traded.

    After years of moderate to atrocious rate of return and reading hundreds of books ( which really did not help my cause), I read some stuff by Anders Eriksson as you mentioned in your blog. Then one day i picked out an easiest technique in the book and started to practice it again and again in training mode on my software. I tried/practiced this method on thousands of stocks, commodities, currencies, bullion. I tried different types of entries put in a volatility filter and so on. Nothing complicated really…. But just found something that works for me.

    Now everyday i make it a point to practice this method at least 1-2 hours a day.

    Thanks for everything… it was your blog that helped me improve my trading. I have recommended your blog to several friends but no one actually reads it.. and they are still losing…


  6. Hi Manish

    I am so happy to hear that I helped you.

    That said, you deserve all the credit for your success. You showed a commitment and willingess to change – a willingness to move outside your comfort zone.

    Few are willing to do this.

    Most bewbies talk a great talk; only a few, like you, are willing to walk a great talk.

    Every success!

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