Professionals trade manually, not with EAs! - page 8
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as an economist I will try to answer:
the best way to manage risk is to use many TS at the same time,
without fitting parameters and with the use of MM - first of all I am referring to the use of ANTIMARTIN in MM.
Mostly at the beginning there are attacks of anger towards the whole world, except for the jokes :-)
it passes with time and you start to look at things adequately and the world seems better, even when the deposit is close to zero :)
+1
C-4 said all the right things. except that "auto-motivate" risk management doesn't sound real. Here's one thing I'm curious about. Who thinks about "risk management"? I would be very happy to hear from economists!
For me, the question sounded something like: "Bookkeeping should only be done in the mind (or manually in the accounts), the use of a computer is silly and unrealistic. Who thinks about it?"
You've got to be kidding me.
C-4 said all the right things. except that "auto-motivate" risk management doesn't sound real. Here's one thing I'm curious about. Who thinks about "risk management"? I would be very happy to hear from economists!
Although the question is a general answer as a certified economist. No one alone has the power to control the market, the price of goods, the level of supply and demand for it. All that is given to us is to manage our own risks, i.e. no matter how banal it sounds, we can control the level of our losses. However, there are many misconceptions here too, here are some of them:
1. Stop Loss is evil. It produces losses. You should try to avoid stops. My answer: Stop Loss does not make losses, it fixes them. Only two components cause losses: the price going against the position and the broker's commission. In the first case, you have to look for more accurate market entries, in the second, you have to make fewer trades and take more profits. Avoiding stops often means seeking to lock in small profits, which encourages you to make frequent trades, which in turn increases the broker's commission, and therefore your losses.
2. Averaging is bad, and pyramiding is good. It does not matter whether you are averaging or pyramiding. You enter the market - therefore a certain amount of loss is already recorded in your account in the form of commission. It does not matter what state your previous positions are in (in the red zone (averaging) or the green zone (pyramiding). All that is there is an unrealized profit or loss.
3. The risk per trade is no more than 2% (3%). All these are empty words and this rule is often violated by traders who believe that they adhere to it. If a trader makes 20 trades a day, each of which has a 2% risk, it means that the trader risks 40% of his/her deposit within a day. If at one moment in time the trader has 4 transactions on different instruments, each of which is 2% of the deposit, then the unrealized loss is 8%. If at least one of the four transactions is transferred to Breakeven, the unrealized loss will be 6%. If three out of four trades have profit protection of 2%, the aggregate unrealized profit is 6% (2*3) and aggregate unrealized loss is 2% (1*2%). The total unrealised profit/loss is +4% (6%-2%).
Technical analysis = risk management. There is no connection between the risks you take and the entry points into the market. The worst option is to open trades randomly. And even in this case you will be right 50% of the time. Stops do not protect traders from trend lines, support and resistance levels, Fibonacci lines and Ishimoku channels. Stops simply do not allow you to win back, thereby protecting the trader's equity. There is no difference whether the price reverses after your stop is hit or not. The market doesn't care. Stop fixes the drawdown of equity, no more and no less. This is what Larry Williams wrote about in his latest book.
There are several risk management models. What they have in common is the size of losses. All parameters are simple and easy to understand, and most importantly they are known (you always know how much money you have). Therefore they are easy to mathematically formulate and program accordingly, so there is no problem here.
Although the question is a general one, I will answer it as a trained economist. No one alone has the power to control the market, the price of a commodity, the level of supply and demand for it. All that is given to us is to manage our risks, i.e. as cliché as it sounds, we can control the level of our losses. However, there are many misconceptions here too, here are some of them:
1. Stop Loss is evil. It produces losses. You should try to avoid stops. My answer: Stop Loss does not make losses, it fixes them. There are only two components that cause losses: the price going against the position and the broker's commission. In the first case, you have to look for more accurate market entries, in the second, you have to make fewer trades and take more profits. Avoiding stops often means seeking to lock in small profits, which encourages you to make frequent trades, which in turn increases the broker's commission, and therefore your losses.
2. Averaging is bad, and pyramiding is good. It does not matter whether you are averaging or pyramiding. You enter the market - therefore a certain amount of loss is already recorded in your account in the form of commission. It does not matter what state your previous positions are in (in the red zone (averaging) or the green zone (pyramiding). All that is there is an unrealized profit or loss.
3. The risk per trade is no more than 2% (3%). All these are empty words and this rule is often violated by traders who believe that they adhere to it. If a trader makes 20 trades a day, each of which has a 2% risk, it means that the trader risks 40% of his/her deposit within a day. If at one moment in time the trader has 4 transactions on different instruments, each of which is 2% of the deposit, then the unrealized loss is 8%. If at least one of the four transactions is transferred to Breakeven, the unrealized loss will be 6%. If three out of four trades have profit protection of 2%, the aggregate unrealized profit is 6% (2*3) and aggregate unrealized loss is 2% (1*2%). The total unrealised profit/loss is +4% (6%-2%).
Technical analysis = risk management. There is no connection between the risks you take and the entry points into the market. The worst option is to open trades randomly. And even in this case you will be right 50% of the time. Stops do not protect traders from trend lines, support and resistance levels, Fibonacci lines and Ishimoku channels. Stops simply do not allow you to win back, thereby protecting the trader's equity. There is no difference whether the price reverses after your stop is hit or not. The market doesn't care. Stop fixes the drawdown of equity, no more and no less. Larry Williams wrote about it in his latest book.
There are several risk management models. What they have in common is the size of losses. All parameters are simple and clear, and most importantly known (you always know how much money you have). So, they are easy to mathematical formulae and consequently to program.
Hmm, as a certified economist I want to make some amendments to your post colleague, which may seem unimportant, but in fact they are important:
1. I completely agree. The trading literature (it's like an independent expert) confirms this.
2. I agree. Likewise.
3. And here's a correction: risk ON ONE idea. For example, that the dollar will rise against the yen is ONE idea. Different ideas can be all or little related, so the risk is not multiplied by the number of trades.
The calculation of risk depends directly on your decision-making model. As far as you are confident in the reasonableness of opening a trade, that's how much you should set your stops. Some traders close trades by TIME of gambling with no profit (no movement needed), they get rid of trades whose behaviour is too unclear or too protracted. So calculating risk can be very complicated and problematic.
Hm, as a trained economist I would like to amend your post colleague, which may seem unimportant, but in fact they are important:
1. I completely agree. The trading literature (it's like an independent expert) confirms this.
2. I agree. Likewise.
3. And here's a correction: risk ON ONE idea. For example, that the dollar will rise against the yen is ONE idea. Different ideas can be totally or marginally related, so the risk is not multiplied by the number of trades.
The calculation of risk depends directly on your decision-making model. As far as you are confident in the reasonableness of opening a trade, that's how much you should set your stops. Some traders close trades by TIME of gambling without profit (without the right movement), they get rid of trades whose behavior is too unclear or delayed. So calculating risk can be very complicated and problematic.
It is not possible to cover all the individual cases in one answer. Therefore, the C-4 described is quite literate and should be understandable from a general perspective.
3. А вот тут поправка: риск НА ОДНУ ИДЕЮ. Например, то, что доллар будет расти по отношению к иене - это ОДНА идея. Разные идеи могут быть совсем или мало связанными, поэтому риск не множится на количество сделок.
Suppose a trader believes that the euro will rise against the dollar and goes long on EURUSD (one idea).
At the same time, the trader believes that the pound will fall against the dollar and goes short on GBPUSD (second idea).
Thus, the trader has two opposite positions in correlating instruments. Most likely, the profit in one trade will be compensated by the loss in the other one. The key point here is that we deal with probability. It is quite possible that both positions will be covered by a stop loss, and there will be the corresponding loss in both of them. In this case, the ideas are different, but the result is the same - the losses are always added up, regardless of the idea behind each trade. If you imagine the worst case scenario in advance (all deals close, regardless of the market (or idea) in which they are done), then we save our fragile psyche from the unexpected - and this is risk management.
Note, I'm not saying that having a market position greater than 2% of the deposit is bad. After all, we do need a certain amount of securities to hold several positions at once. What is the maximum amount of the deposit may be placed in the market - is an open question. For example, we open a long position on EUR at the level of 1.2000, using 5% of the deposit. The price goes up. At the level of 1.2500 we open one more long position of 5% of the deposit. Stops are not touched. Then it turns out that the cumulative risk is 10%. The price will reverse downwards and close the second position using a stop loss first, and then the first one, also using a stop loss. But if at the opening of the second position we bring the first one to Breakeven, the total risk will be only 5% (0%+5%). This way we build up the position without increasing the risk level.
This is all true, of course. It's just that I was speaking in the "spirit of the law" rather than in the "letter of the law" so to speak.