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I use the definition that
Risk = probability x consequences
qualitatively in my trading. Perhaps if I were more experienced or had
thoroughly tested and proven systems I could use it quantitatively. With
that said, I can offer some illustrations of how the concept can be used.
First, a trader that scales into positions might be willing to accept a
certain amount of "risk" on a given trade. He takes his initial position
and the market moves in his direction. Experience has shown that if the
market moves in his direction, his probability of success increases and
thus, his probability of failure decreases. The trader can then add to his
position because, although he is increasing his "consequences", his
probability of failure has decreased and his overall "risk" remains
unchanged.
Alternately, there might be a trader that uses two chart patterns for
trading. His experience has shown that one is 50 percent more likely to be
profitable than the other. That trader could take larger positions on the
pattern that is more likely to suceed without taking more "risk".
Finally, there might be a trader that has a system designed for trending
markets and another designed for ranging markets. The trader read somewhere
on the internet that markets trend 1/3 of the time and range 2/3 of the
time. Assuming he is in both systems all of the time, the trader could take
larger positions in his ranging system without increasing his "risk".
These illustrations are highly idealized and it may not be possible or
worthwhile to apply the idea that
Risk = probability x consequences
in a quantitative manner. The point is, however, to make big bets when the
odds are stacked in your favor and play conservatively or fold when the odds
are uncertain or against you. Easier said than done.
Dan
>From: "Gitanshu Buch" <OnWingsOfEagles@xxxxxxxxxxxxx>
>Reply-To: metastock@xxxxxxxxxxxxx
>To: <metastock@xxxxxxxxxxxxx>
>Subject: RE: Gap risk = critical?
>Date: Wed, 12 Jul 2000 19:34:50 -0400
>
> >Risk = probability x consequences
>
>Care to expound using some real world examples?
>Thanks!
>Gitanshu
>
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