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There was a brief discussion here a couple weeks ago regarding trading
risks. In the context of system trading, here is some pretty practical
advice from a pretty practical guy, Chuck LeBeau ( http://traderclub.com/ ).
Cross-posted from the Omega Research list.
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----- Original Message -----
From: <CRLeBeau@xxxxxxx>
To: <omega-list@xxxxxxxxxx>
Sent: July 23, 1999 12:59
Subject: Price shocks and money management
Regardless of whether you trade systematically or use discretion, price
shocks should be avoided. The issues are capital preservation and risk
control. These issues override systems and market opinions.
In the long run the outcome of price shocks is random. It only seems that
the shocks always go against us. If we ignored all potential price shocks
we would have the same result as if we went flat for all potential price
shocks. The point is that ignoring the potential shocks increases the risk
with no benefit and going flat or hedging the potential shocks reduces risk
with no loss of profit. The correct choice is obvious.
Systems should not be overridden for directional or timing purposes but they
should be overridden when it comes to issues of risk control. The highest
or worst risk is the risk that cannot be quantified. These risks should
definitely be avoided regardless of your trading style.
Assessing many elements of risk is possible on a systematic basis but it can
never be foolproof. If the discretionary assessment is that the risk is
unknown or unacceptable then the system should be overridden.
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