Shares - Risk and Success Brett N Steenbarger Ph.D...

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Risk and Success Brett N. Steenbarger, Ph.D. Sometimes you hear people debate whether trading success is attributable more to trading techniques vs. psychology. The answer, of course, is both—but the point where the two intersect is risk management. A huge percentage of trading success or failure can be laid at the doorstep of risk management. A recent book on risk management (that I’ll be reviewing next week) observed that, across different traders and trading firms, 90% of all profits were attributable to 10% of all trades. While traders would like to think of themselves as making money on a majority of their trades, the reality for frequent traders is that a minority of trades are winners—and it is the few large winners that produce a favorable profit/loss statement (P/L). The book goes on to observe that, if 10% of trades account for a majority of profits, it follows that a large percentage of trades have to be “scratched”. A cardinal skill in trading is recognizing that a trade is wrong before it hurts the P/L. Time and again, I have seen good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them. And yet it is equally true that, if 10% of trades are going to account for the lion’s share of profits, traders must be willing to milk very good trades. This not only means finding the sweet spot where you can “cut your losses and let your profits run”; it also means being willing to trade sufficient size to maximize returns from a good trade. The worst traders I know put on their maximum size when they’re trading at their worst. Typically, they
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This note was uploaded on 08/11/2009 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.

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Shares - Risk and Success Brett N Steenbarger Ph.D...

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