Risk Management VIII

BarroMetrics Views: Risk Management VI

Turning to the last post in this series.

Paul’s second question:

2. Fund Managers advise clients to ?Buy and Hold?, with average-costing strategy.
This is investing/trading without stop-loss.
Does it work consistently?

That would depend on market conditions, and the lifetime of the investor has wouldn’t it? For example if I had bought the DJIA in Jan 1931 at 197, I would not have broken even till Oct 1945. Now at my age, that almost 20 year wait would have probably exceeded my lifetime. And this assumes, that the stock I bought had remained solvent.

On the other hand, if you had bought at  14,198 in Oct 2007, with the DJIA now at above 16,000 you would be sitting pretty.

Buy and hold is a viable strategy at the right time and in the right hands. According to me service we did see buy and hold funds post a negative return for 2012 and the first quarter of 2013.  And this brings me to the final question.

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

By that I suppose you mean your position sizing.

The first point would be my admonition that ‘no stop loss’ does not mean ‘no predefined exit conditions’.  So, for me, I’d use the average loss for your predefined exit conditions, and vary that up or down depending on whether I was in Ebb or Flow stage.

Happy Easter everyone!

6 thoughts on “Risk Management VIII”

  1. hi Ray,
    Money Management, I refer to
    a.predefined exit conditions
    b.position sizing

    Predefined exit conditions:
    If not proprietary, could you elaborate how you “vary that up or down depending on whether I was in Ebb or Flow stage”.



  2. Hi Paul

    I can give you a general idea of what I do:

    1) Determine what is normal size.
    2) Determine your benchmarks for ebb stage.
    3) Reduce position size at 1st stage of ebb (e.g. 20% or 25% reduction of normal size);
    4) if ebb continues continue to reduce progressively to a maximum of 85%.
    5) Determine benchmarks for flow stage. Progressively increase size.

    Because my flow stage is, on average, shorter but sharper (i.e. greater profits) than ebb, I seek greater initial evidence of being in flow, but increase position size more rapidly (I have only 2 increases, 50% more and 1000% more than normal)

  3. Hi Paul

    Normal size is a function of:

    1) The loss resulting from probability of consecutive losses.
    2) Your average profitability p.a.
    3) The volatility of the market (you can use 14-period ATR to measure this)

    (For me {1} should be no more than 50% of {2})

    Assuming the ATR is neutral (i.e. little change between (a) and (b)):

    a) if your avg profitability is 20% and you have a probability of 5 consecutive losses, 2% per trade would be the normal risk.

    b) On the other hand, if your avg profitability is 10%, then 1% per trade would be normal size.

    The number of lots would depend on normal risk.

  4. hi Ray,

    This is the first time I was introduced to the concept of using
    a. The loss resulting from probability of consecutive losses, and
    2) Average profitability p.a., and
    3) The volatility of the market (you can use 14-period ATR to measure this)

    to determine Normal Size.

    You have covered solid and important stuff for BIG trading sucess in this series.

    A small booklet produced, consolidating all the stuff, for quick refeence and reminder would be useful for all the traders!

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