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Which Risk Management approach is "best"?
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Which Risk Management approach is "best"?

  #1 (permalink)
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Which Risk Management approach is "best"?

I am trying to work out which risk management approach is best for me. Bearing in mind I am a beginner trader and I need to tame my "monkey", I am willing to sacrifice profit for a strategy that is easy on the ego. Before you jump down my throat I realise that a good trader needs to learn to take losses. I know that. There are various approaches to risk management that I've found:
  1. All in, all out, no stop movement
  2. All in, all out, move stop to breakeven after trade has moved 1R in favour
  3. All in, scale out, no stop movement
  4. All in, scale out, move stop to breakeven after trade has moved 1R in favour
  5. Scale in, all out, no stop movement
  6. Scale in, all out, trailing stop with each scale-in
  7. Scale in, scale out
I intend to do some modelling and testing using the market replay feature of NinjaTrader and may do a YouTube video of it and post it up for you, but I would love to hear what experienced, consistently profitable traders do. I do realise that the risk management model must suit the personality of the trader, and I am seeking a risk management model that is easy to trade, and am willing to sacrifice performance (in terms of reward) for consistency and a smoother equity curve. It's easier on the "monkey".


Last edited by keymoo; April 8th, 2012 at 05:31 AM. Reason: reprased
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  #3 (permalink)
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There is no right answer that applies to you.

You have to find the method that works best for you, your style, your method, your personality, your risk aversion, your thrill seeking, etc.

You have already compiled a list of the popular methods, so unless you are not understanding how they work, I am afraid that you are really on your own here. You have to use trial and error and find the one that "speaks to you".

I would not place much emphasis on what others say works for them in this regard, because it is just too "personal" meaning it is what works for them and we are not all the same. Better to find what works for you.

Only comment I have about your list is the trailing stop and breakeven after a certain move in the market. I caution against any of these kinds of trailing stops.

Your entry is a function of the market price action, yes? Your exit, the same, yes? Why would your trailing stop be based on something that has to do with your account size? You are trading the market. You are not trading "your account size". While risk is extremely crucial in determining position sizing, I do not believe a stop (of any kind) should be a function of account size. Rather, stop is a function of the market price action, and then you must scale your position to conform with your account size (ie: not risking more than 1%).

Don't make the mistake of entering a trade and setting a stop blindly based on how much you are willing to lose. Market doesn't care about that. Set a stop where your signal is no longer valid.

Don't move your stop up (trail) during a trade for the same bad reasons. A stop should be moved up if you have a reason based on market action to do so.

No doubt, it is much harder to master this. And I think it is fine for beginners to use trailing stops to help them along, but you should break away from this as soon as possible, because using such an arbitrary trailing stop is going to hurt you far more than help you. For example, you will get taken out of a trade and find yourself thinking "This trade is still valid, why am I flat?"

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Question Mike.. If the parameters of the trail method for the stop are set right couldn't it keep you IN a move for perhaps almost all of it?

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PowerBroker View Post
Question Mike.. If the parameters of the trail method for the stop are set right couldn't it keep you IN a move for perhaps almost all of it?

I am afraid you will need to actually be a good trader in order to trade well. There is no short cut, including a magic trailing stop indicator or ATM template.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
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2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

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  #6 (permalink)
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Thanks for the replies.

I am leaning towards either:

Scale-in, All out (when I mean scale in, I mean only add positions when market is going in your favour, not average down)

or

All in, scale out

And possibly even consider tailoring the risk management strategy for the conditions. For example in a quiet trading range, enter on limit orders and go all-in all-out with tight stops and targets. In a trend, possibly scale-in on pullbacks and then get out all at once when there's a strong reversal signal.

I am attracted to the scale-in, all out approach because it means that losers will be small if the initial position is wrong. But then it could be psychologically difficult to add a position and give yourself a worse average price.

Hmm, I guess what I'll have to do is try various styles and find one that works for me.

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  #7 (permalink)
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I am afraid you will need to actually be a good trader in order to trade well. There is no short cut, including a magic trailing stop indicator or ATM template.

Mike

I guess all of us dummies don't have a clue. Sorry I asked.

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  #8 (permalink)
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PowerBroker View Post
I guess all of us dummies don't have a clue. Sorry I asked.

Sorry, that is not what I meant.

What I meant is that I see people constantly looking for a shortcut. The desired effect of this shortcut is to trade better.

I understand the search, but I think it is the wrong path. A golfer might constantly look for better clubs, better balls, better gloves, shoes, etc... but none of those things are going to improve the score when the golfer can't control his temper, loses control, doesn't follow his rules, etc.

Searching for the "right parameters" of a trailing stop, indicator or ATM or otherwise, is a move down this wrong path in my opinion.

What I meant by my comment was that if you want to get the most out of a trade, there is no shortcut for actually being a good trader.

What may keep you in the trade today will take you out tomorrow, for no reason other than your indicator settings. This is why I am a discretionary trader and not a mechanical trader. I prefer to make my own decisions, but I was once very much addicted to a long set of rules and conditions (primarily created by indicator combinations). I finally realized they were hurting me and holding me back, so I got rid of them and decided to work on actually improving myself as a trader, instead of working on becoming a better indicator creator or working to become a better parameter setter.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

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  #9 (permalink)
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Noted Mike. Thank you very much for the clarification.

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Expectancy


Thought I would post this since you mentioned it Mike.

Expectancy

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