11/12: Risk Management Doctor (yours truly) & Mr France

I thought I should provide an update on how the working relationship with Mr France is getting on.  Mr France began trading a small amount of my trading capital 3-4 weeks ago.  It seems that Mr France is a great trader in terms of being able to read the charts, taking positions, and particularly good at adding to winning positions.  What Mr France was lacking is his understanding of risk management and this has led to repeatedly doing significant damage to various trading accounts over the last two years.  This has led to us deciding to work together – combining his trading skills with my risk management skills.

I never really thought that there was a lot to know about risk management because it came quite easily to me.  Now having worked with Mr France for several weeks, it makes me realise that I might have underestimated my level of knowledge in this area.  Here are some examples of things we discussed in recent days:

  1. How to calculate your initial position size
  2. How much to risk per trade – how to calculate the risk in relation to the trading account size
  3. The need to ignore actual position size in terms of lots, and the need to focus on building a good foundation and understanding of risk management
  4. How position size will change depending on which currency pair you are trading – basically depending on the denomination of the instrument being traded – is it denominated in US$ (such as the US indices, crude oil, gold any fx pair ending with USD such as EURUSD or AUDUSD), in Euros (such as the DAX, CAC or other European index), or in say Australian dollars (e.g. the ASX index or EURAUD or GBPADU) or in GBP (such as the FTSE index or any pair ending in GBP such as EURGBP)  – note this is not required if one is using spread-betting because the spreadbet is always expressed as a certain GBP/point (or whatever your currency is denominated in)
  5. If adding to an existing position – how much to add, depending on initial risk, new stop loss, and how much profit to lock in
  6. Managing risk ahead of significant news announcements – basically any Tier-1 news event e.g. UK 9.30am news for all GBP crosses, weekly oil inventories for oil, NFP and ECB press conference for all markets
  7. Managing risk on fx positions held over the weekend – and handling the opening of the markets on Sunday evening
  8. Reducing risk after having a bad trading session
  9. Handling risk increases if the account size is increased
  10. Managing the balance between optimal bankroll growth and minimizing the possibility of blowing up the account – this involves a discussion of the Kelly principle
  11. The need for consistency in always applying the same amount of risk from one trader to another
  12. Question of how many positions can be open simultaneously and understanding the correlation between open positions – this area must be tremendously difficult to understand because not even dozens of PhD’s and the 1997 Nobel prize winners Scholes and Merton (see Black-Scholes option pricing model) were able to correctly predict cross-correlations, which led to the bankruptcy of the Long Term Capital Management fund
  13. Assessing whether one is in the right state of mind to trade (physically, mentally and from a technology/resource perspective)
  14. Understanding rollover and financing charges (and the 10pm GMT timing and associated widening of spreads)
  15. Understanding whether or not to accept deposit bonuses from brokers

It looks as if Mr France is learning very quickly.  He understand all these concepts I am trying to convey to him and is implementing them in his trading.  So far so good.

Some time ago, I made a post about transaction costs – illustrating the concepts with the use of casino games – entitled “Trading compared to Roulette”.  That post is probably quite relevant to this post.

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9 Responses to 11/12: Risk Management Doctor (yours truly) & Mr France

  1. Stephanie Sy says:

    can you talk about more on #15 please? when and when do we not accept bonus from brokers?

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    • Thanks for asking a question on this.

      Most of the time broker bonuses have certain conditions attached – these conditions normally state how much trading you will need to complete
      before the bonus is truly yours. In many cases that I have seen, only a huge amount of overtrading and/or truly excessive position sizing would be required in order to satisfy the bonus requirements. In other words trading within reasonable risk management rules and being selective with setups, would not enable the trader to meet the bonus requirements. If you initially get the bonus credited, and then lose the entire bonus without having earned it, then the you are going to be in trouble!

      Every now and then something good does come along – for example ETX Capital did a bonus for new clients. From memory, ETX said they would reimburse the trader for up to £300 of losses after 5 trades (of more or less any size) for new accounts. That was a reasonable bonus.

      Hope that helps.

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    • Here’s an example of some terms & conditions – for a current 10% deposit bonus up to £10,000 from InterTrader. Have a read through it and think whether this is a good bonus or not.

      http://www.intertrader.com/special_offers/10k_offer.html

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      • Stephanie Sy says:

        Hi George,

        I’ve look through the terms and conditions. It sounds like they are giving 10% as additional funds for trading. They wouldn’t allow this to be withdrawn but can be used for trading. It appears that if the money is lost through trading, this 10% bonus is not a liability to the trader. If the trader makes more (i.e. more than the initial deposit +10% bonus = £500 + £50), the trader takes all the profits. Say account balance grows to £650. The trader can keep £100 without sharing the profit with company. Is this understanding right?

        Regards,

        Stephanie

        Liked by 1 person

      • Hi Stephanie. The bonus can in fact be withdrawn. The amount of the bonus is the initial benefit to the trader. however, in order to be entitled to the bonus, the trader must complete a minimum number of trades (in other words he/she must generate a certain amount of spread for the broker). To lay claim to a £50 bonus you must make £100 worth of spreadbets. You can assume that the spread is at least 1 point on these bets – so in other words you must spend £100 in spread in order to get a £50 bonus. If you are going to execute the trades anyway, then the bonus effectively reduces your transaction costs. But that aside I don’t think it’s a great deal. It’s very similar to online casinos offering deposit bonuses but stipulating a minimum level of betting action before the bonus belongs to the trade. In the casino’s situation, the edge is the house edge in the game (blackjack, roulette etc). With the broker, the edge is in the spread.

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  2. Here’s another example of a 100% deposit bonus – is this bonus good or not?

    https://www.volantefx.com/deposit/deposit25/terms.php

    Like

  3. Pingback: 9/10 – Do Retail Traders stand a chance against professional traders? | George's FX trading blog

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