SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

Risk Management- Conveyor Belt Processing of Trades.

2 min read

WHITE SWANS -ALWAYS EXCITING TO SWIM WITH

 Greed does make all of us to be attracted to all kinds of rewards or opportunities our luck or life tosses at us.We tend to develop biases and act confidently expecting positive outcome.This is our approach to life called positive approach virtues of which is in our DNA.Disappointments and failures are taken in stride as inevitable part and parcel of our life.This is indeed human nature.This behavior turns into disaster of  terrific magnitude in financial world where risk is endemic and is only constant.Reward is not mirage but oasis in the desert of risks.Ignoring or dismissing this reality is sure invitation to Skiing from the cliff.

Bell-Curve

 

“Invest in preparedness not in prediction. Remember that infinite vigilance is not possible.” Nassim  Nicholas Taleb.

RISK MANAGEMENT

Like everything else mass produced today to get value added products for public consumption ,Trades we enter over a period have to be  processed for us to get our expected outcome.We can not just enter trades relying on our bias born out many triggers surrounding us.This become purely subjective adventure projected into market and we become victim of our bias not that of market.In order to process our trades we need system which must have been back tested for its robustness.It has to select trades for us and should have entries and exits as most of us already know.Most of all ,the system should be smart enough to monitor the inventory of all our trades to ensure that risk is in control and within our target.Yes that is our risk profile.Normal frequency distribution of our risk and rewards over a chosen period of time can easily demonstrate this parameter from time to time.This is Risk management analysis.

RECONCILIATION FACTOR

Controlling reward is never a tension.But controlling risk  always is.A reconciliation factor  for the Risk which can not fixed as common for all but has to be customised at any given moment can track and give alarm.Any system has to process and control risk dynamically.Risks happen only when your trade goes against you.And it does so most of times contrary to our experience with rewards.So one has to focus on boring risk and you have to target cutting risk.

TRADE SAPLINGS LIKE THEY DO IN NURSERIES.

Doing business with sapling is not less lucrative as compared to being in business of Teak plantation.You tend to grow horizontally but you grow nonetheless.Remember You always have freedom to chose but you have no freedom to chose consequence.Your ability to exercise wise discretion can make or break you when executing trades.Following simple and easy to remember principle are like personal protection in processing industry to ensure best quality outcome. 

BULLETS FOR MOVING TARGETS

1. Chose small trade sizes .

2.Multiple trades of small sizes using whatever edge you found out to have favourable odds gives you a bell curve of trade.This can be adjusted from time to time thereby giving you a tool to control Risk.

3.Hedging strategies.

4.Monitoring and targeting a reconciliation factor of risk which is your personal and has to be customized depending on your  risk profile.

CONCLUSION

This is exactly in line with Quality ,Health and Safety Policy and principles followed by any industry.This is systemic approach to trading.The more diligence applied, more competitive you are in trading.Just have look at Bell curve above.Trained eye can see catastrophe as well also trading opportunities.

SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

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