Risk Control
A trading system alone will not assure success without proper risk control beginning with each trade and continuing until a portfolio of different trading methods is created. Systems have losing streaks that will ruin any investor with inadequate resources and poor timing; a speculator must decide the initial capitalization. the markets to trade, and when to increase or decrease leverage. There are risks that can be controlled or reduced, called systematic risk, and another called market risk, that can take the torn] of a price shock and can never be eliminated.
This series of posts tries to cover a broad range of topics relating to risk, including individual trade risk, leverage, portfolio diversification and allocation, price shocks. and catastrophic risk. It is not possible to say that one is more important than another. in a specific situation, any one of the areas discussed may be the answer to preventing substantial loss. The first part of this series of posts discusses capitalization and shows why man,.traders m-ill be successful for months and then lose everything in only a few clays. It will explain the choices in leveraging and offer alternatives of less risk. The last section analyzes when a system is performing properly and when it is not living up to its expectations.
Risk control begins with a trading philosophy the most common is called conservation of capital. it is the assurance that the investor has been given the most opportunities for success, which usually translates into keeping losses small. This is often accomplished by allowing only small losses per trade or using a trend following system. Once a trend position is established, it is held as long as prices continue in the direction of the position it is closed out when the trend changes. The resulting performance profile is one of’ more frequent small losses and fewer large profits.