In today’s article, I would like to summarize all the important things that I have learned in trading in the last decade. Let’s go for it!
1. Risk management and positive RRR
We started working on our private fund and application with our team three years ago. At first, we asked ourselves a fundamental question: “How can we change risk management to a really high and sophisticated level?” Keep in mind the fact that our first steps in working with our own fund were not which broker to use, which server to have, or which strategies to use. All of these questions would not be meaningful unless we understand that the basis for successful trading is primarily high-quality risk and portfolio management.
The advantage in the market does not last forever. Strategies fail over time (although some can work for years), markets change faster than ever, and drawdowns were, are, and will always be present. So the question is: what is the best way to deal with it? All these are aspects that must be resolved at the risk management level and not at the level of brokers, servers and strategies.
From my point of view, the most important thing is to create a concept of how to see money management as a whole. Our elementary approach is based on the philosophy that each strategy in a portfolio is like a single employee in a large company. And the objective of managing such a company is not based on the fact that each employee must receive the same share of the company’s resources (the same percentage of capital), but that each employee must have resources dynamically allocated according to their performance; how effective they are and how they are contributing to the business as a whole. Therefore, our risk management is based on a very dynamic real-time assessment of the actual effectiveness of all “employees”. That means, not only from the point of view of its unique effectiveness, but also from the point of view of its functionality as a whole. Based on this assessment, different resources are dynamically assigned to each “employee” over time.
At the same time, it is important to take into account all the resources of the company as a whole (we can see it as a cash flow) and these resources also increase or decrease globally depending on the performance of the company as a whole.
In such a management model, it is important to consider many different aspects, from the analysis of the quality of each operation, the distribution of the last ones, as well as of all existing operations through different analyzes of equity, volatility and current quality of markets. . Therefore, the model is very dynamic and can literally change every minute the allocation of resources to each “employee” and also to the entire company. Naturally, I will not elaborate on this subject.
The point for which I am writing this is very simple: it is really important to have a clear idea of how to manage capital. You don’t need fancy models if you don’t plan to manage large amounts of money, but if you are a small “ordinary” trader, you need to know what percentage of capital you risk per trade. If such risk makes sense from the point of Monte Carlo analysis (and the maximum possible Monte Carlo reduction) and also to have a specific plan on when and how to increase or decrease the number of contracts, and how to deal with strategies and patterns that they are currently having a bad period (these strategies should not receive the same resources as those that are working well).
I highly suggest trading with positive RRR. From my personal experience, it is easy to find a beautiful and fluid equity with negative or 1: 1 RRR, but later on in the commissions and slippage come in and the cards change radically at your disadvantage.
Also, I suggest a book called “Definite to Position Sizing”, which I used to inspire me for my background.
2. Periodic maintenance and adaptation
From the experience I have gained over the years, whatever edge you have in the market, whatever trading approach and path you have, your edge will need occasional changes, updates and maintenance (even if it operates on a discretionary basis).
Some changes are changes in stop-loss and exits (better adaptation to the new volatility); sometimes it is a regular optimization; sometimes small changes in a fundamental idea of the edge. Occasionally some of this work will be done using self-adaptive algorithms and requirements on your behalf. But even so, it will take a few different levels of regular maintenance.
There is no definite advantage that you can constantly operate unchanged. Markets are changing too fast and therefore appropriate changes need to be made in parallel. Occasionally, it is necessary to change the composition of the portfolio; occasionally to change a market or a period of time, or to change the number of positions thanks to constantly changing volatility. These are all things that come with experience and are very important.
If you look at this from a different angle, it is like any other profession in life. Whatever you do, new trends, new tools, new requirements are constantly emerging and we have to learn to adapt. If we don’t, we can’t be successful at anything in this dynamic world (not even trading).
The good thing is that it is not as bad as it seems. In short, it is important to trade and gain experience, to reconcile that we will never be perfect and occasionally make mistakes, to learn from them. The more we operate, the easier it will be to make a decision on occasional changes in order to adapt. Our decisions will not always be correct, but it is the way in life (if we are reasonably diversified, the occasional wrong decisions will be balanced by a series of good decisions. In our background we are dealing with volatility a lot and on many different levels; from optimizations. from systems to proprietary self-adaptive algorithms and indicators, to concepts that work with adaptability across the portfolio.
The need to know how to adapt is an elementary part of survival in life. This is actually great news because it means that in our genes there is everything we need for us to adapt. We just need to learn how to use it.
3. Learning is an endless process
The preceding paragraph leads to the last important point that I need to discuss here: learning is a never-ending process. Trade is a way of life, it is a way of life. If you have chosen trade, and I mean you really did choose it, then it will probably be with you for the rest of your life. And that means there will always be something to learn, there will always be something new. And this is something that makes the journey of a trader even more exciting.
To be honest, I have a feeling that I still don’t know much even after more than 10 years in the trade. Yes, I have made remarkable progress. In our background, with our team, we are realizing and discovering really incredible things. Although I have the feeling that I don’t know much about trading. Perhaps today you know more about risk management than why markets move the way they do. You may be able to develop a broader trading and risk management concept today than before, but that does not mean that you have found more certainty in the markets. Trade continues to be an uncertain path. That is why it is negotiated, that is why it is speculation. But what is true these days is not even a civil servant position anymore.
I have the feeling that there is always something to learn. Every day we are amazed by new discoveries that need new and creative thoughts and ideas to be able to implement them in the right way. Even after 10 years I am still reading trade books; I learn from other traders and am discovering more and more new things.
In trading there is always something to improve.
And this is how it will probably always be for traders. This is one reason you need to enjoy trading, why you need to be passionate to be successful in the long run.
On the other hand, I must say that you will learn a lot, not only about trading, but also about yourself and life. In fact, I am amazed at what I have learned about myself and life from trading.
Try to approach the trade also with an open mind and not only from a logical point of view. That would be a mistake, since trading requires logic, heart and creativity.
Happy trading!