9 rules of risk management

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”:

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.
 https://twitter.com/algoflows/status/1580967592310632459?s=20&t=lTOgeN-
Z0cbiIwTuMnjWPQ

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:
o If we got the result we wanted, we assume it must be because we did something
right
o 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.