Paradoxes of Risk

This may be willing to comprehend that if people are frantically seeking remuneration for the physical, they're also easy to retreat, as their ultimate aim is the pleasure, which means that the achievement of this goal should be quick and easy, or problems with obtaining the pay would be more than the reward. Their prevailing mood, then, becomes a passionate, then relaxed, the fierce, the prostrate. Death is often less afraid of them than perseverance in continuous efforts in motion to the same result.

Alexis de Tocqueville

From an early age, we all learned our family, school, and indeed any other social-shaping force in our society that we avoid risk. Inappropriate risk; play that safely - advice for which we are accustomed from childhood. In conventional wisdom, the risk is asymmetric - it is only one bad side. From my experience - and I suppose that any other - this is the usual presentation of the risk is shortsighted and often just wrong.

My first observation is that successful people understand that risk, properly conceived, is often very productive, rather than something which should be avoided. They estimate that the risk is an advantage that should be used rather than a trap that must be circumvented. Such people understand that taking calculated risks is very different from that associated with recklessness. This idea of risk is not only unorthodox, it is ironic - the first of several paradoxes that I'm going to present to you in this article. This can be rephrased to read - risk is a dangerous game. Much more often than you may imagine, a real risk in life is connected with the refusal of risk. In other words, in fact, most threatening dangers usually occurs when you're evading a confrontation with the fact that only seems to be most at risk. What is widely regarded as a safe game, is not safe. What I propose here is not unambiguously guaranteed formula for success. This formula simply does not exist and never will be. If anyone ever tries to sell you a formula, it is better to leave their money with them. In life, first of all, there is a risk. I do not try to dispel this risk with the help of a magical elixir. I can only give you a little food for thought. I have a few suggestions. You might not agree with them. But if you even think about them, I felt that the time we spent together was not spent in vain. We all know that modern civilization has much to ancient Greeks. Since the 20th century ended, it is difficult to call the Greek thinker, who spoke more directly to us than Garaklit. Everything flows, everything changes - Heraclitus said about 2,500 years ago. Nothing can withstand the test of time, everything changed.

Most of us agrees with the postulate that nothing withstands the test of time, everything changes, but the conclusions following from it still deserves some explanation. Obviously, if the change is a fundamental rule of life, then resistance to change is foolish and doomed to defeat. Just as obviously, if the change is a constant, the uncertainty is an unavoidable part of our lives. Uncertainty is inevitable, life is unpredictable. The very essence of life is an unexpected and unintended, unexpected turns, we can metaphorically ascribe fate or Providence. Consequently, if we do not want to be like a shipwreck on the waves of the inevitable changes, we must take place in the middle of change.

We must learn to go on stream changes, rather than swim against it - even people who do not perceive the problem to learn how the world really works, would be to think that we are doing exactly the opposite. In other words, the risk is usually thought of as a movement against the flow, the selection of the difficult road to the highest chances. However, in a world of constant change, in a world that Heraclitus said that "it is impossible to enter into one and the same river twice", the assumption of risk is the adoption of the flow of change and movement along with it. Remember the first paradox - just like the risk of ill-exposure risk. For those who understand the reality, the risk is actually the safest way to cope with the changing, uncertain world. Adoption of the risk in fact is a dive into the circumstances that we can not completely control. But the fact that the circumstances in this life that we can totally control, are so small and so trivial, that are barely any effort. In addition, the lack of absolute control, which is impossible in any case, does not entail the absence of any control or substantial control. Here again there is a paradox - in a world of constant change, the risk is actually a form of security, because it takes such a world, what it is. In line with traditional values, safe, where indeed there is a danger, because it denies and resists the world.

I believe that you understand that when I say that the risk of actually safe, I'm talking about a specific form of risk. I do not advise you that you jumped from a skyscraper in the hope that the ongoing changes in the law of gravity will deploy in mid-flight. I speak rather of some form of risk that you actually adjusts to the direction of change.

To be more specific, I am firmly convinced that the kind of risk, which takes a trader in a position to control their lot in a world of continuous change is a risk, which adds some value to this world. To create value, concentrating its efforts on increasing that deserves attention involves (as we see) a sort of risk. And yet, paradoxically, it provides you the greatest control over the changing world and maximize your ability to achieve truly significant personal satisfaction.

Forex Magazine
based on www.turtletrader.com

The risks and success

Brett N. Stinberger - Doctor of Philosophy and Professor of Psychiatry at the Medical University in Syracuse, NY. New York. He is also an active trader and writes articles on market psychology. The author of the book "Psychology of Trade, 2003. Doctor Stinberger published over 50 articles on short-term approaches to behavioral change for traders.

Sometimes you can hear the various debates as to whether more commercial success with trading techniques or psychology. The answer of course is that with the fact and with another, but the point where they intersect - this is risk management. A huge percentage of commercial success or failure can be established through risk management. In one article on risk management were given the data that different traders and trading companies, 90% of all profits were associated with 10% of all transactions. While traders would make money on most of their transactions, the reality for traders is that only a minority of transactions are winning - and those few big wins provide an advantageous ratio of profits to losses. Article continues to review that, if 10% of transactions is of great profits, it follows that a large percentage of transactions should be in time to give. A key skill in trade was the recognition that the transaction was wrong before she upset the ratio of profits to losses. Very often I have seen good traders out of the transaction when the transaction were not able to move in their direction, while the bad traders come only once the market has moved against them. Yet, equally true that, if 10% of transactions are going to be the lion's share of the profits, traders should be ready to receive the maximum benefit from good deals. This not only means finding the right moment, when you can cut your losses and let your profits grow, it also means being ready to sell a sufficient size to maximize profits from a good deal. Bad traders, who I met, offer the maximum size of position when they are in the worst moments of their trade. Typically, they have just lost one or more transactions, and is now trying to return the money. Successful traders are able to determine the excellent shopping opportunities and patient in waiting for them - and use the maximum allowable size of the position to make maximum use of these opportunities to their advantage. That is why 10 of good deals to more than fill 90 empty and losing deals. One very successful trader has promised to tell me the secret of trading success. Of course, my curiosity was piqued and I asked, "What is it?" He answered the question: "What is your best position in relation to a normal size?" "Three to one," I said. He smiled, "Consider 20 to 1," was his advice and his formula for success.

I trust him completely. The secret of his success has nothing to do with finding a better oscillator, regression analysis or graphical models. He was successful because he had the ability to identify and to wait especially lucrative opportunities, and then derive maximum benefit from them. While the 20:1 ratio of the size of the position will be slightly velikovato for me personally, I think that this principle applies: the success is partly a function of determining the amount of the transaction on the logical rather than psychological cause. This is one reason why trade is so difficult. It is an unusual mixture of features, which allows the trader to be prudent to risk giving up the transactions that are not moving as quickly as expected, while there is a good opportunity to derive maximum benefit from it. It is easy to find traders who are reluctant to take risks and keep their positions within one or two lots, as well as easy to find traders who would be free to vary the size of positions, including those times when they are upset their trade. What occurs much less frequently, it is traders holding "golden mean" - can take to limit and 90% of the cases that do not work, and to act aggressively in 10% of cases where there is a movement that can make maximum use.

What is true to size, will also be true with respect to time. Much can be found just to see how long a trader holding a winning deal to losing the deal. If a trader goes quickly from transactions that do not move in the desired direction, the average retention time of such transactions must be sufficiently low. On the contrary, for a successful transaction, it is not unusual to see that 10% of transactions are kept for a long period of time.

In doing so, almost invariably it is winning deals that generate a significant share of overall profits. Do unsuccessful traders as can observe a small percentage of deals with long-term retention - but it is losing the deal. I once asked a trader, why he held a long position in the unusually long period of time. He looked at me somewhat derisively and said, "because I had the authority to do so!" He was ready to sit in during a very volatile market, while he was walking in his direction and so far nothing has indicated that he is ill-defined bottom. This transaction is one made by his month's earnings. This may be true for much of his life. The same is often true on success in career and business. Successful people are able to take on a dozen projects over the years, but to concentrate on only one of them, when it seems promising. The Company may issue the ten models of a product, and quickly abandon the nine others, making significant money for that which was adopted by the market. Even successful artists and inventors, as it turned out the researcher Keith Simonton, tend to spend a large amount of creative effort in the different works, with its popularity thanks to a small number of works, which will attract the attention of people.

Good traders manage the risk in the market. Successful people manage the risk in their lives. This not only relates to how many different attempts we are making in life, but also on how many we turn in life that determines our ability to derive maximum benefit from the promising episodes that occur in our way.

Forex Magazine
based on www.brettsteenbarger.com

Automating the process of risk management

Blessed is he who believeth. This expression is remembered when it comes to investors and traders, persistently trying to create a trading system. Their efforts are often wasted because the wrong is determined by the task, and incorrectly formulated criteria for the selection rules. World standard of risk assessment allows the application of well-known model in the management of capital in the financial markets to maximize revenue.

Who is faster: the system or trader?
The main difficulty in the creation of trading systems is not so much with the problem, but with the way it is handled, and what criteria guided by its creators, creating an algorithm for generating trading signals. Illustration of what can lead to inaccurate understanding of the objectives is presented in the diagram (Fig. 1).

In fact, the efforts of traders and analysts in the design of trading systems designed to create a set of technical indicators, providing information on the possibility of the deal. Despite the abundance of all kinds of indicators, in reality, we almost always deal with some middle-or compilation, which is expected to better analyze the behavior of prices.

Perhaps best of all possible options - to refer to indicators that provide the ability to monitor the processes of convergence and divergence. Think for yourself if the price rising or falling, and we can see, and without an indicator, then why do we generally refer to it for advice, whether price increases or decreases it?

Is well known that the enormous effort spent on the search for effective solutions in the investment industry, do not provide the necessary return on invested work and time spent. This raises the question: Is there any sense at all to deal with this issue, if it turns out that its decision may only be temporary in nature? Indeed, in this case, it turns out a simple truth: any investor, self-created or purchased by the trading system must be understood in advance of its doomed. In fact, it has only two options: he will have to make some money before the system would destroy his own expense, or it will destroy investment capital before you will make money. Unfortunately, no system of decision-making in financial markets is indispensable. At least, because only a specific set of rules will help to determine when, why and when to enter the market, get out again, and where to install a security freeze order designed to limit the risk of trading positions. Hence the natural question: what criteria should govern in determining the level for the production of protective stop orders?

Search criteria
The concept of determining the measure of risk by the criterion of allowable losses, called VaR (Value-at-Risk), - to solve this problem is almost automatic. This is because the VaR is the maximum loss for the specified time horizon and the size of the position in a particular financial instrument [1].

The amount of risk in this methodology is evaluated on the basis of the principle of determining the maximum possible deviation of the price at a specified level of probability, which are known as level of confidence. That provides a measure of price zones that are known, we likely will not be reached the market.

For example, if the 95% VaR of spot foreign exchange market the euro / dollar for the position of $ 100 thousand in the 5-day time horizon is 1878.80 (= 1.645h0.0051h100000hv5 - where 0.0051 - daily volatility, 100000 - the size of the position 5 - the horizon, the number of days ), it means: with a 95% probability of position-term value of $ 100 thousand would not be changed by more than $ 1878.80. In another it can be interpreted as follows: for three days 95% of the total price will be scattered around a reference point in such a way that the deviation does not provide a change in the value of the position of more than $ 1878.80. Naturally, the remaining 5% loss probability of an event that will provide the excess of this figure. The same way you can describe any confidence, for which the calculation of VaR. We have an opportunity to assess the exact numbers, the value of potential losses in any obviously depends on the level of probability. To do this, we should change the coefficient in the formula for calculating VaR. For example, desiring to find the 99%-ing chance, instead of 1.645 ... 2.3264 should be used ... (often rounded up to 1.65 and 2.33). A natural question is: where do these numbers and how many should we use when we suddenly wanted to know 98 -, 97 - or 65 per cent probability?

The author of any book involving the subject, feels obligated to bring the table to find the required value. But it is not suitable for the modern trader, which requires quick assessment of the situation, rather than yawing posting. In addition, it is sufficiently powerful computers, so the prospect of yaw on the books is just ridiculous. Fortunately, the formula used in the VaR ratio is the argument of the cumulative normal distribution function, therefore, to ascertain its value can be much easier - just ask the capabilities of spreadsheets. For example, in Excel there is a feature that allows you to extract the argument, knowing the importance of confidence, or - the likelihood, which is recorded as NORMSINV (probability).

Having now an opportunity to fully automate the process of ascertaining the measures of risk for any specified probability, we define a formula for calculating the amount of protective stop orders. In the context of the task it will be as follows:

The amount of stop-loss = (F (probability) x x Size Volatility position x vGorizont - Operating costs for the position) / volume of the position.

Using the derived formula may allow qualified to monitor market risk. But the most important point is that it is based on generally accepted methods of risk assessment, has now become almost standard in the industry.

Test fitness
Attempting to use this formula to specific assets shows: in some cases, we obtain a protective stop order that can scare their size.

For example, a 3-day stop-order, which is 95% will not be hurt by random market swings, the market for euro / dollar will be located at a distance of 135 points, and the shares whose daily volatility of 3%, the model will offer a stop-loss at a distance not less than 8% from the current price. The nature of the mutual dependence of the value of loss and the probability of its occurrence almost unchanged for any market. The difference is the amount of loss, which depends on the volatility of the instrument (Fig. 2).

Of course, such values do not appear reasonable, if only we do not have the appropriate coverage in the form of profits, comes back to us as a result of the use of risk. But, based on empirical observations, one can say that in reality, traders are ready to take on far greater risk than the accepted estimate of the model. For example, if we assume that we are only 35% of the cases to get a loss (and have noticed that this proposal will have to taste a large number of traders), it turns out that the model tells us quite a different value of maximum risk. For example, a 3-day 65% VaR 100 thousandth position on the euro / dollar would now equal $ 334, and stop-loss is proposed that no more than 25 points. A similar conclusion may be reached by contacting any other asset that is well demonstrated Table 1.

If you look at the market as a random stochastic process (analysis of science necessarily say "Wiener process"), we might note that our chances of getting a loss is still above 35%. If the price change has not brought us to the profit and resulted in a loss that is less than creating a protective stop-order, in this moment of time we have ravnoveroyatnostny outcome for any market direction. But we do not consider the situation from the standpoint of statistics, but from the perspective of a trader trying to act in direction, and assume that it has at least a few rules to ensure proper entry into the trend and getting the maximum possible (or pre-set) returns. This radically changes the situation. For example, the trading system creates signals for opening and closing of the long and short positions. Risk management is carried out as follows.

1. Initially, the protective stop order is determined by the 3-day 65% VaR.
2. At the end of 3 days with a favorable outcome (the occurrence of return) starts the procedure "tracking" stop-order, excluding the loss.
3. If after 3 days of creating the position of loss, but the stop-order is not affected and there is no signal to close a position, it is seen as a new position, and presented a new protective stop-order on 3-day 65% VaR. This will ensure a permanent presence in the market, while protecting against losses that exceed a specified limit trader.

Obviously, the probability of winning with this strategy will depend on the nature of the probability distribution of two independent systems. The first is a set of rules that create trade signals, and the second - that the above system of risk management, with the exception of "tracking" stop-order. In general, it is the third system, but we are not going to take it into account. Rate the likelihood of earning income, as well as the probability value of gains and losses it is now possible, using the VaR model for multiple assets. If your trading system will be characterized by high skorrelirovannostyu, you should expect losses no higher than 35%, whereas the gains will occur in the remaining cases (65%). Accordingly, the reduction of the correlation will lead to a deterioration in this ratio. With zero correlation distribution yield the position will take the form presented in Figure 3 (without leverage).


The key to high yield
Now ask, but what may be the performance? So, we have every reason to benefit, the value of which is in the degree of dependence on time, which is derived from the model for calculating VaR. Since the establishment of a trading system described above, we believe that we will be in the position longer than 3 days (this period we have released to verify the truth of trade signals), then to assess the value of return is reasonable to use another time horizon. Obviously, it depends directly on the holding time positions, which creates revenue, so we define it as "the horizon of income." Accordingly, the time horizon used to determine stop-loss, is called a "horizon of losses."

Given all the considerations, we can determine the value of the income position by expressing it as a spread between the VaR-s different time horizons (for a per option):

Spread income (%) = F (probability) x x Volatility (vGori-income umbrella - vGorizont losses).

Based on this formula, it is possible to estimate the annual yield. To do so, must take into account the impact of costs and turnover. If the number of trading days is equal to 252, the wording of the net revenue will be as follows (per option):

Net yield (%) = 252 x (Spread income (%) - Costs (%))/( probability of income x vGori-income umbrella + Probability of loss x vGorizont loss).

The study of behavior of this function leads to rather curious results. First, while reducing the horizon, an increase in yield loss. Secondly, there is a point to maximize the likelihood for fixed parameters (the trader shall appoint its own).

In doing so, with the growth rate "the horizon of the income / loss of horizon" at the outset there has been an increase in yield, which upon reaching the maximum starts to progressively decline. Solution of Partial gives a formula directly calculating the rate at which the maximum yield is observed. Bring it here is impossible because of the excessive length, but the basics of owning a differential analysis can easily obtain it themselves.

Figure 4 gives a visual representation of the nature of returns, depending on levels of income and losses. In general, however, consistent with other variables, the growth rate "the horizon of the income / loss of horizon" occurs when the reduced volatility and loss of horizon, as well as increasing the probability of loss (reduced confidence) and an increase in transaction costs.


These laws are essential for practical application. Of all the variables that affect the resultant yield only a temporary loss of horizon, and to-let rate probability of loss is directly dependent on the investor. All other parameters virtually unchanged for the market and the existing terms of trade.

Thus, the maximum possible rate of return can be obtained only if a certain investment horizon, which is closely linked to the horizon losses. Studies have shown that the rate does not differ-resistant: it is different in the same market for different values of the horizon of losses due to the impact of costs.

In Table 2, calculations are made for the 65% case the confidence level (35% likelihood of loss).


The boundaries of the horizon of income (last column) were determined by the criterion of deviation of the annual yield from the maximum value of 10%. It should be noted: compression horizon losses up to 1 hour model requires significantly lengthen the horizon of income, which has more than 1 trading day for the currency, and stock markets. The range of indicators and the horizon ratio of income to the FOREX market is the result of ambiguity of defining the number of trading hours, which should be taken into account because of substantial fluctuations in the volume of trade and liquidity.

Do not forget to improve the performance!
Thus, the results show one thing: to maximize the annual yield is only possible while maintaining a certain ratio between the horizon and the horizon is the loss of income. As in the analysis we are dealing with a factor, the induction conditions could come not only from the horizon of losses, but also on the horizon of income. This is extremely important, because much investor confidence, and traders can determine the time spent in the position, ie investment horizon of (income, as we have defined above) than the horizon of the loss (the time of initially put a protective stop order).

For example, if a trader on the stock market involves working with 65% by confidence level (35% loss), while in the trading position of no more than 3 days, the horizon must be stowed in the loss of 2.5 hours (if the trading activity lasted 7 hours). That is, if the rules of entry into the market make use of time schedules, the stop-loss should no longer act in 3 hours. If a trader wishes to operate at 95% by level of confidence (to take greater risks), the time horizon of losses should not exceed 4 hours. Is expected (of course, theoretical) rate of return would increase almost threefold.

At half-diagrams period ALPHABETICAL allowed to get confidence, stretched to a maximum of 6 bars. After this time a strategy should be to create a profit or have to decide whether to remain in the position further. Please note the rules for risk management (see above) suggest at this point to review the level of protective stop orders if the trading system did not give conflicting signals. Finally, in this model, we find a clear border investment, expansion of which is not conducive to the growth of profitable operations in the financial markets.

The test, remove all the questions
Left to consider the results of applying the concept of risk management, using the model of VaR.

To test was chosen as a typical trend trading system (such systems are not very effective, as opposed to specially created for the purpose of the actual earnings of money). Nevertheless, it is actually used one of the banks that manage assets of clients, and successful. Accordingly, it has a detailed history of transactions on the great historical depth and allow for an objective study.

In order to not change the correctness of any one trading signal, including a mechanism for closing loss-making transactions through the stop-loss. The only thing that was done - added automatic floor protective stop orders, computed for the 65% case the confidence level and 1-day horizon. The choice of the horizon was due to the nature of the medium-term trading system which makes the retention of positions within 2-3 days. If not, a favorable movement in prices is supposed to use a stop-order, which appeared first in the way of the market. As a result of this connection, it turned out that the modified strategy is significantly ahead of the typical trading system. The test was carried out on the market shares of RAO UES of Russia "and covered the period of almost three years, more precisely - 1031 daily. Re-investment had been made and the initial capital of 10 thousand rubles, including the reserves to cover possible losses. During the studied time interval the value of stop-orders, identified by the 65% VaR, undergoing fluctuations from 0.24% to 3.3% of the value of shares.

Main results
Main results are presented in Table 3, which shows that consistent with the key indicators that determine the gains, there has been a significant increase in annual revenue, as positive indicators of change, describing the loss. Please note, the increase in the effectiveness of the strategy it has a factor of risk management that is well demonstrated by reduction in the maximum "The settling of a" (drawdown), and recorded losses in one transaction, as well as the sharp decline in the total loss.


In general, the risk of initial trading strategies declined by at least two times, while the growth return on capital. In conclusion, the illustration is to present changes in equity for the different versions: the original trading system and that which includes the principle of freeze-VaR-orders (Fig. 5).


Thus, the proposed model of risk management, which determines the size of a protective stop-order and using the concept of VaR, seems quite promising. Most importantly, the considered algorithm is based on generally accepted standards and methods for assessing market risk. And since the VaR model is widely applied in the working practices of financial institutions, holding the leading position in the industry, despite the obvious shortcomings of the existing and the concept of stop-VaR-order simply has no equal. An additional argument in favor of the scheme outlined - this is its compatibility with the VaR-method for determining the reserves to cover market risk, is now used by the civilized world banking community. Of course, the question remains as to how qualified can be used by the model, because without understanding the foundations of risk management solutions at 90% over today's volatile markets will provide losses that are able to correct any of the most sophisticated financial technologies.

Michael Chekulayev

Managing money

Here are some quotes of some famous traders and investors:

• «I never met a rich technology» - Jim Rogers.

• «I always laugh over people who say,« I have never met a rich technique », I like it! It is arrogant, nonsensical response. I used the fundamental analysis for 9 years, and prospered as a technical player »- Mary Schwartz.

• «diversify their investments» - John Templeton.

• «Diversification is insurance against ignorance» - William O'Neill.

• «Do not try to buy at the base» - Peter Lynch.

• «Do not try to buy or sell at the base of the top» - Bernard Baruch

• «Perhaps, the trend is your friend, and within a few minutes in Chicago, but basically, this is rarely a way to become rich» - Jim Rogers.

• «I am confident that the biggest money in the market made a turn. Everyone said that you fail, try to choose the tops and bases, and you make all your money by playing on the trend in the middle. Well, for a period of twelve years, I skip the profit in the middle, but I made a lot of money at tops and bases ». - Paul Tudor Jones.
So, here we have a group of people who collectively earn billions of dollars trading on the market, and they can not agree on how to make money. Not one. So, what do we do? Is there anything in what they do agree? Only one:

• «My main advice - do not waste your money» - Jim Rogers.

• «I'm more concerned about the management of losses. Learn to take losses. The most important thing when trading in the market is to not let your losses get out of control ». - Mary Schwartz.

• «I always think about the loss of money as opposed to thinking about making money. Do not concentrate on making money, concentrate on protecting what you have »- Paul Tudor Jones.

• «Rule number one investment - never lose money. Rule number two - never forget rule number one »- Warren Buffett.

Indeed there are many ways to make money in the market. There are thousands of workshops for which you can pay, and where the lecturer will tell you how he made $ 1 billion on the stock exchange. In the same place you will be able to book his sister «How do I double my money every hour», which is available in various forms, for only $ 29.95. All they tell you about some of the models who will work at one time and not in another. Some of you may go a long way from Jimmy Rogers, while others will do so with Bernard Baruch, but the most critical component of making money on the market - do not lose much. You should always make a stop-order and lose only a part. You should not lose too much, because tomorrow you will not earn a penny, if all of a sudden bust today.

One of the most common errors committed by the trader - is the risk of all capital. There is no faster way to bust than to do so. Studies that have been made about this, suggest the risk of a transaction, not more than 2% of the commercial capital. A majority of professionals will tell you that this is too many, and they run the risk of 1 / 4% to 1% of each transaction. The idea is that no transaction should not affect at all your capital and your entire trade. You do not want to become rich in this case, but you also do not find the need to sell your house, as has so often happened with other people.

Another advantage of small positions is that they allow you to be free from anxiety. If you risk a rather small number, you will not be «shake». You also will not be in a position where you say «Stop, I can not lose so much money», and makes you a bad deal in terrible investment. Thus, if you're serious about this, if you want to trade on long-term basis, you will practice prudent management of money. Before you enter into the market, the first thing about which you need to ask ourselves is - How much do I risk in this transaction. Remember that we are here to make money, but we can not do anything unless we bust.

The key to survival lies in the fact that you have to respect the risk, take a small position, which does not allow you to burn. You should always bear in mind that in the trade, you only play at the possibilities. You can have a model that works correctly in 75% of cases, but each transaction - this is a separate case. It does not take into account the most recent transaction. If you have 75% of th system, you can still be wrong 10 times in a row, and if you sell any amount of time it will happen sooner or later.

I once thought he found a reliable way to make money at roulette. I played on the black and red. I would be sitting at the table and after the ball fell to the black or red 5 times in a row, I began to put on the opposite color (for example, if it were a row of five red, I started to bet on black). Then, if I was wrong, I would go further and doubles. This means that if I started with $ 1, the next time I would put $ 2, then 4 $, then $ 8, $ 16, etc. Ultimately, I would have won, and won $ 1. Then I was 13 years old, and I really thought he found the «Holy Grail chalice». If it was so easy to find the 13-year-old boy, then why all the casinos are not destroyed, but all the players do not become millionaires. Because it's not working.

If we toss a coin, every time we have 50% of the first chance that get the eagle, as well as tails. But each throw is independent of the previous one. The subsequent throw a coin has nothing to do with made before. This is a pure accident. There is some chance that rolled in the eagle series of throws, or tails. But which of the shots - it is pure coincidence. Every time you toss a coin, this is one of the billions of tossing a coin tossing. That's why you can fall 100 consecutive eagles, if you toss a coin long enough.

That is why for the first time I played roulette, black has fallen 19 times in a row, and I went home a loser.
Trade the same. We have a certain percentage of our transactions, which will be good, and some percentage that will fail. But you follow the deal has nothing to do with the previous one. Thus, even if you have the most accurate method in the world, over time you destroy, if you do not practice good money management and control of risk.

So, now that we all understand why money management and control of risk are very important, let us explain how exactly to apply these rules to your trading. As I said before, you should not ever risk more than 2% of your world accounts in one transaction. But, as I said, for most people this is too much, and I belong to this group most people. I like to keep your risk within approximately 1%. So let me draw your attention to the risk of 1% of your trading account. For the purposes of this example let's assume that you have a very average size of the account - $ 25,000:

Let's say you have seen tonight and the graphics market ran to a timetable XYZ, which looks like this, it could be a big deal at the oscillation, when buying at a price of 15 3 / 16. At least the previous day at 14 1 / 2. This means that you place your stop-order to 14 7 / 16, the risk of 3 / 4 points on the deal. Taking $ 25,000 as a trading account, you can lose up to $ 250 in one transaction. You will use this value to determine how many lots or contracts you can buy. Assume that your number of contracts is up to 333 contracts. Most people do not like to do odd lots, so it is possible to round down to 300. Do not round up, because in this case you exceed the allowable level of risk.

Let me offer you a few quotations about the control of risk:

• «If you have an approach that allows you to make money, then money management can make the difference between success and failure. I try to be conservative in its risk management. I want to be sure that I will be in the game tomorrow. Risk control is essential ». - Monroe Trout

• «If you're represents a loss, then you can not sell». - Bruce Kovner

• «The best traders have no ego. You should swallow their pride and go out of the losses ». - Tom Baldwin

• «Never risk more than 1% of your total assets in any transaction. Risk of 1%, I am indifferent to any particular transaction. Permanent preservation of the risk at low levels is absolutely necessary ». - Larry Haytham.
While all of these traders have different techniques to make money, each of them agrees that control of risk is the single most important aspect of trade. These traders are the best in the world and the only thing on which they agree - it is control of risk. Think about it.

Brandon Frederikson
www.hardrightedge.com

Consistency of Trade

The risk of inconsistency
The "stop and start trading on the new" does not work. When you sell any method or system for a while and then stop and start selling other method or system, and then comes back and then start again with another method, you lose probably a certain characteristic of a system or method. Likewise, when you sell and then sell, or choose a certain method of signals. You are destroying the likelihood. The market does not change its rules each day or week. The market allows the probabilities over time.

A trader sent me the following message:
"I have violated their own rules. My attitude to the trade deteriorates. I want to go back to trading on a demo account for a little while to get back to the track and prove to himself that my methods work and return a little bit of confidence. What do you think about this ?

If your methods do not work, or you have doubts about them, you should not deal in these methods. This is contrary to common sense.

Before you start trading in some way, it is vital to check that it works. Also, it is important to decide for themselves in advance what the conditions would have to occur to stop the trade. You should try the double historic decline? You will need to be a loser for a period of time? Or should certain factors will change the market environment? Consider all this in advance.

Start and stop the trade is not working. Yet it is quite a typical thing that makes a trader. Traders often sell some way, losing a little or a lot, and stop, and then try to create or find something better. Then they will sell a new method, or advanced techniques, yet time is not lost, and they stop and repeat the process again. Again and again, many times. This distorts the probabilities. The previous method would often die only when they stop. The new method starts to lose only when they begin. Important sequence.

For this reason, I suggest those who like to continuously explore, even when they sell them to the changes introduced at the beginning of the month. In this way they will not be endlessly traded yesterday's transactions. For example, if the last time you allowed your profits grow and subsequently lost it, this time you seize their profits quickly only to watch as it grows without you. Consistency - that is the only way adjusted to the probability.

With regard to trade in educational accounts, there are two conditions for which, I believe, is desirable. Trades on a demo account where you will learn the technique. Trades on a demo account where you prove the method. Stop trading on a demo account in which both conditions are satisfied.

If you sell on a demo account for too long, you can get stuck in a comfortable condition, when there is no risk. Soon you'll have a problem with pressing the "trigger" when trading a live account. I often saw the traders, who could not make the entry too long after the trade on a demo account. Trading on a demo account can be a way of life, something like an interesting hobby. There is nothing wrong, in addition, it will not bring you any money, or teach your self.

If a trader, sent me a message, do not know work or not his methods for some time, he must stop and realize it. On the other hand, if he had just violated their own rules and thus do not actually selling their method, it must work on themselves, rather than on methods.

What if you could only decide outside the independence of what is required to develop self-control and become a consistently profitable trader? Remember that the more expensive cost of all closed or confusing opinion, which will cost you money your entire life. This will manifest itself, in that trade, not trade, this method of trading, trade order method, or to reject proven system or method. And this does not help the blind adherence to a system that does not work. Then we'll talk about the dangers of foolish consistency.

Severe foolish consistency
When the sequence of trade is the basis of the method, and when it becomes stupid? Trained to be consistent in applying the method, learning to trade, despite the recession, the decline has not ended, I once traded until the losses have not reached excessive proportions.

My sister said, "Stop! This is not working."
I said, "when I stopped, it starts to work. You have to be consistent."

At that time I talked to a man who had a large number of traders, trading on his money. He told me that every year he overestimates and refuses to approximately 10% of traders. He said that he kept year after year, those traders who stopped selling the system for some time, when it did not work, and resume again on her trade, when it started working. It made sense to me, but I wondered how to resist the order to not fall into the trap?

We all know people who are starting to trade on the best system, and then stop selling it when it ceases to make money. They buy another advantageous system and bidding for it, until it becomes unprofitable. Meanwhile, the former method is advantageous, so that they are returned to the first method, or purchase a third, and repeat the process of trade and change of methods. Invariably, these people are finishing up losing money.

I also know people who are selling a system consistently, even though they lose money. Some come out of the trade to be successful over time, and some lose their entire capital.

One thing of which I have warned traders who have research methods is to make changes to the system at the beginning of the month. This will allow them to continue research to find the best method, but prevents them from continuing to change their systems to adapt their latest deal. Make changes only at the beginning of the month will keep them from confusing systems.

The problem underlying the issue, constantly trading system during a recession, is to ascertain whether changes in the characteristics of the market that makes the system obsolete, or change in market behavior is temporary. There is always a temptation to think that the market has changed, and perhaps this is the case, and perhaps not.

Before you start trading on the system, you must make sure that it was not established on old data. You must observe the effectiveness of the system for trade in real time. You should consider the history of decline and understand what is typical and what to expect. As already mentioned, you should expect that you will double the historical decline in the real trade, and you must be willing to trade during the greater decline. If you decline more than the same period, it is possible that market characteristics have changed. Perhaps the system is outdated.

At a time when my system has experienced decline, my sister said, "It is clear that your approach does not work. Why do something that does not work?"

"Really, why?" - I ask myself. If this does not work, do not do this.

While watching some of my history, you would have to go back to 1970. To see a decline in the proportion that I have experienced. So, I was in a decline in the history of the system. On the other hand, I did not want to continue to lose money. This is not my style. On the other hand, I did not want to leave just before it starts working again. Downturns in good systems, usually accompanied by large periods of winnings.

Does the sequence of I silly? It looked this way. Here's what I decided to do, and I regret that I have not considered this possibility earlier. After a certain period of recession will be, I have ceased to trade and to monitor their systems. When the system returns to be profitable within a week, I am reviving trade. This will work? The study shows that will be. Of course, the future is always unknown.

Above we talked about the danger of inconsistency. True that we need consistency in the application and performance, to enable the probabilities of any method to work for us. But how long we continue to do what is not working? The answer is in the beginning. Decide in advance what conditions will make you stop or pause in the application of the method.

Forex Magazine
based on www.marketmavens.com