Subjective Risk Management

BarroMetrics Views: Subjective Risk Management

In preparing for my talk on Risk Management sponsored by CMC Markets (see attachment: Art of Trading.pdf), it struck how important a role the subjective aspects are for Risk Management.

Our Vision and Goals set the scene for the driver of our Trading Rules (of which Trade Management forms a part; Trade Management is one aspect of Risk Management) and Money Management Rules. In the latter case, our subjective risk profile defines our trading philosophy; in turn our risk profile dictates the type of Money Management Rules we apply.

In my case for example, I first seek to preserve my capital through the consistent execution of my Trading rules and Risk Management Rules. Only when that safety is secured will I seek superior returns.

This means that sometimes I will forego what appears to be a superior reward to risk because I assess that the probability of success is too low; other times, I’ll exit a trade at break-even or a small loss only to re-enter at a worse off price – because at the time of the exit, I assessed that the probability of success was no longer in my favour.

The approach may not work for every one, but it works well enough for me.


5 thoughts on “Subjective Risk Management”

  1. Subjective risk management changes for me as I try different styles of trading. I am now in a cashflow style of trading and I find that, even though the risk is low, I am favouring smaller returns. The difference between higher returns and smaller returns is not so much based on the level or amount of risk as the risk of missing the trade due to trying to get a higher return.

    A different sort of risk altogether from what I was playing with up until now as it is a different sort of trade style.


  2. Hi Jeff

    Thanks for the post.

    Yes I agree, a function of risk management is a trader’s personality which dictates the risk one takes.

  3. Hi Ray,
    Since I have gone about 10 sessions with positive expectancy I believe I have the bones of a working strategy and am naturally eager to get off the simulator.
    I read a book tonight which claims that most institutional traders do not make much in terms of % within a day’s timeframe. On a 25k account, a 20% return is 5k per year which comes to 100.00 a week (50 weeks of trading). I’m at the beginning of my third year and would love some advice. On the simulator I was making 500.00 a week. Some think that because of the ’emotion’ of live trading that I should have really small goals, yet I get the feeling that my system could provide 500.00 a week income. Can you shed any light on this? It would be very frustrating to trade so small and set my goals so tiny. I guess I am focusing more on how much I want to make rather than how much I am willing to risk. Is this common?

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