When I blew my account up back in 2018 there were no reliable resources or champions of the max loss.
Four years later, we've come a long way with it but but, even so, I think that it’s still very misunderstood.
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Four years later, we've come a long way with it but but, even so, I think that it’s still very misunderstood.
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For the most part, people know what it is and that is great.
We still see a lot of traders refuse to put one on however. The typical excuse is that they are not going to rely on a “crutch”, the equivalent of calling professional traders and their risk managers impotent.
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We still see a lot of traders refuse to put one on however. The typical excuse is that they are not going to rely on a “crutch”, the equivalent of calling professional traders and their risk managers impotent.
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Further, it is very obvious to me that the critical error really just lies in the structuring of the risk controls and the understanding of their effective use.
In many cases, traders see it as something to deal with rarely, sort of like an emergency fire extinguisher.
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In many cases, traders see it as something to deal with rarely, sort of like an emergency fire extinguisher.
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However I see it as much more than that.
In my view the proper risk controls are finely tuned to your average trading statistics, most importantly your win rate and average win/loss.
You should be able to determine the proportionate amount of risk on ANY variable level.
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In my view the proper risk controls are finely tuned to your average trading statistics, most importantly your win rate and average win/loss.
You should be able to determine the proportionate amount of risk on ANY variable level.
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By that I mean, even if your style is to size up drastically or size down depending on your setup, you should still be maintaining an average baseline performance consistent with your trading history. The only difference is money, scale is just a factor of multiplication.
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That is a very simple process but must be made bespoke to each individual trader.
A way to step into that path is to define your avg RR by using the formula: avg win / avg loss
This will help you understand what your expected return is on that specific setup or overall.
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A way to step into that path is to define your avg RR by using the formula: avg win / avg loss
This will help you understand what your expected return is on that specific setup or overall.
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You can get as granular as you wish, especially important if you have different strategies or styles like a swing trading accnt or long/short accnt.
In any case you will be able to determine exactly how much risk to give your trade to the downside on avg b4 it’s abnormal.
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In any case you will be able to determine exactly how much risk to give your trade to the downside on avg b4 it’s abnormal.
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Yes it is a little meticulous but also might positively impact your discipline by considering to reducing your strategy variance. That way you have less controls to put into place and can be an elite risk manager.
To me they are totally in sync with what, and how, I trade.
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To me they are totally in sync with what, and how, I trade.
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It’s not uncommon for me to hit a position max loss or a daily max loss at all.
I can have those conditions met daily in some cases and does it mean I’m failing or being too exhaustively cautious?
No, not at all.
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I can have those conditions met daily in some cases and does it mean I’m failing or being too exhaustively cautious?
No, not at all.
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I actually have deliberately set those controls based on concrete data.
Everything about it should make sense in a way that will give you ample opportunities to execute on an edge but no more than necessary.
In my entire career the main mistake I see is that…
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Everything about it should make sense in a way that will give you ample opportunities to execute on an edge but no more than necessary.
In my entire career the main mistake I see is that…
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…a trader can develop such a strong “conviction” on a trade that he is willing to ignore all the signs that he is wrong. Further, he will execute his “edge” erroneously in a vengeful and tilted state as the stock continues to go against him (or her).
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This is the flaw we seek the fortify against. No matter how far out you look into the law of large numbers, you can still do immense damage to yourself by letting one ticker in particular get you emotionally bent out of shape. LET THEM GO. IT IS OKAY TO MAX OUT.
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The flip side argument is that the max loss will prevent the trader from executing their edge and potentially lose them money when right.
Few things:
1. I argue you didn’t put in the work to analyze your stats/strategy and it’s deservedly so
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Few things:
1. I argue you didn’t put in the work to analyze your stats/strategy and it’s deservedly so
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2. I submit that there are special moments where you will have hit a max out but still have the clarity of mind to trade the setup before you OR you had an extraneous factor take you out like slippage or an outlier event.
2a. To this I say that’s absolutely possible and…
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2a. To this I say that’s absolutely possible and…
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…does happen from time to time.
In those instances I will, in fact, override my controls by allowing ONE more attempt, not wiping out the entire control setting it to OFF.
I do so with clear rationale and logic as well as accept the new risk ahead of that next trade.
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In those instances I will, in fact, override my controls by allowing ONE more attempt, not wiping out the entire control setting it to OFF.
I do so with clear rationale and logic as well as accept the new risk ahead of that next trade.
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What the max loss’ purpose is in my eyes is to prevent the next irrational execution you would likely make out of an emotional response.
By getting a moment to sit with rejection (say your platform rejects the order), you will be able to snap out of ur insanity momentarily.
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By getting a moment to sit with rejection (say your platform rejects the order), you will be able to snap out of ur insanity momentarily.
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This is exactly why I use them in the first place and it’s prevented calamity after calamity.
I see no viable excuse not to use one and no reason beyond laziness as to not refine it.
If you want to size up and think it’s impossible to use, think harder.
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I see no viable excuse not to use one and no reason beyond laziness as to not refine it.
If you want to size up and think it’s impossible to use, think harder.
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Literally just take your settings and multiply it by your new risk.
I hope you know what your new risk is! Perhaps you don’t and maybe this practice would help you recognize that your skills are not as sharp as your PNL wants to suggest.
It’s all ego and closed mindedness.
End
I hope you know what your new risk is! Perhaps you don’t and maybe this practice would help you recognize that your skills are not as sharp as your PNL wants to suggest.
It’s all ego and closed mindedness.
End
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