9 rules of risk management

Wanted to make 12 rules but Jordan Peterson has copyrighted it

A close friend of mine had a bad week at the markets this week.

I really really want to stress some important tips about risk management for both funded trading and trading your own money.

1. If you don’t listen to anything else, at least listen to this one.

   Have a predefined daily stoploss as a percent of your portfolio( or drawdown if trading prop)

   Humans have a very bad case of “Get-even-itis”:

AlgoFlows | Futures, Equities & Crypto @algoflows

individual investors tend to have “getevenitis” that makes them crave to recover their loss and thus make decisions accordingly (i.e., to keep the stocks till the loss is recovered). Relevant empirical evidence resonates with this intuition.

Having a daily and weekly dollar loss limit helps you from tilting.
I read this on SMB capital blog and it has stuck with me.
”An antidote for the experienced trader to having one of this crushing days both financially and emotionally is to set a daily stop loss.  There are a few big traders on our desk for who nothing good happens after they are down more than 10k.  Find that number in your trading if you are experienced. Set that as your loss limit.  Empower someone, usually a risk manager at a prop firm, to shut down your trading when you have reached this daily stop loss.” This is extremely serious as I have myself blown up countless binance accounts just trying to make it all back in one trade.

2. There is no “fair value” or “unfair value”. Just because the spooz have dropped 200 points in a day doesn’t mean that the next session would be a bullish one. These biases are account killers. Price is a function of buyer-seller agreement, however disgruntled either party maybe.

3. Do not try to fish bottoms or short the tops. I’m extremely guilty of this one but whenever I do it I have extremely tight stops. I can take a few paper cuts of 2-3 points for a potential 30 point winner.

   

4. Don’t be too harsh on yourself. Everyone has bad days in this profession. You cannot take your worst days as a representative of your trading skillset.

5. Right side of the V. I have been harping about this incessantly on twitter, so go read it.

   AlgoFlows | Futures, Equities & Crypto @algoflows

   In riskier trades do not blindly copy anyone, wait for the right side of the V. @TheOneLanceB has done a great job explaining it.

   

   Lance Breitstein @TheOneLanceB

   THE “RIGHT” SIDE OF THE V: such a powerful concept that many traders don’t conceptually understand. Just bc prices are same, doesn’t mean the e(v) in each moment is the same. Same prices on same chart can have DRASTICALLY DIFFERENT E(V)! (1/4) https://t.co/kiSdYV7U3R

6. Favor process over results. We all do resulting from time to time .
   "Resulting" is a logical fallacy where we evaluate the quality of our decisions based on the outcome they achieve. In other words:

   • If we got the result we wanted, we assume it must be because we did something right

   • If we didn't get the result we wanted, we assume it must be because we did something wrong.

   Oftentimes our trades work on poor processes and they do not work on the correct ones. But we have to understand that resulting is a net-negative in the long run.

7. Identify decision-fatigue: and mitigate it:

   Everyone has a different peak working hours. For some it is an hour or two after they start trading, for others it is the first half an hour. Identify the quality of your decisions over a trading session and see where they start deteriorating. If you are able to spot the inflection point of when/where your decision quality is going to the dogs, just stop trading.

8. Do not multi-task: “Okay this is too much Algo. Trading is essentially multi-tasking and digesting multiple information sources at once to make split-second decisions, how can I stop it?”

   Yes and no. Multi-tasking in relation to a trade is a good idea. Multi-tasking like “attending a zoom meeting while taking a trade”, “watching a tv show”, “playing video games” are not. Before you enter a position, ensure that you are free of all distractions(music is okay I guess) and enter the trade. Once you are in the trade, you can do whatever the fuck you want to do.

9. ATM strategy: When trading futures, most of the times, use an ATM strategy with predefined stops and take profit targets. With appropriate entries, this will ascertain you respect your risk:reward on each trade.
   There are certain times when you should not use an atm strategy like when you are scalping or trading the news(I will write another post on scalping and trading the news later).
   

Well, if you have read this far, congratulations. You are showing willingness to improve and do not have a rigid mindset.

I will leave you finally with this quote:

Fin.