August 04, 2021

Risk Management: Ed Khan’s Professional Opinion. Part 2

Dear readers, you may have the best trading strategy in the world, but without proper risk and money management, you will still lose all your money. It's just a matter of time. Last week we started talking about RM and MM (all details are waiting for you here). Today we will continue with the ins and outs of these aspects of trading. We remind you that the questions of interest to a user are answered by a trader with 9 years of experience, Ed Khan. 

What are indicators that reflect volatility in the market?

Here are the main ones:

  • the ATR (Average True Range) indicator;
  • the distance between the Moving Averages on the senior time-frames (the greater it is, the higher the volatility);
  • the Bollinger Bands.

Does the volatility affect the order size and their number?

The size - of course. The higher the volatility, the fewer contracts in the order.  With low volatility, there are more contracts. When it comes to the number, I believe that trying to tailor it to the market phase is self-deception. We never know when a flat or a trend will end. The most sustainable strategy is the same for any volatility. Attempts to adjust the rules to what is happening on the market are a re-optimization of trading conditions. It would lead to no good. You need to look at the average annual result with average conditions.

How can hedge mode help during the outbreak of turbulence in markets?

Hedge mode or locking – an old trading technique, when a trader (in order not to fix a loss) opens the opposite position under hedge mode. It seems to balance the loss until the price reversals.... Nevertheless, there is not a single advantage of locking before exiting with a stop loss. I'm sure you know when to close a hedging trade, right? If so, what prevents you from exiting with the first stop-loss, and then just re-enter at that cherished point? You will not need to pay double commission and swaps from two transactions that devour your margin. Many people are convinced that stop losses are bad. But in terms of mathematics, there is no difference. So any shifts in the hedge are a psychological trick designed to save you from stress due to fixing a loss. Arbitrage makes a little more sense (hedging not on one, but on different assets). But that's another story for another time.

P.S. Discover more about arbitrage in our article.

How can a manager show greater profitability without showing an increase in risk?

It has been very well-formulated - "not showing". The manager may hide increased risks.  That's when you use stop losses, but you delete them on a strong movement in the hope of a price return. Afterward, you put them back as if nothing had happened. Do I need to mention that such games will one day be catastrophic with a probability of 100 %?  Increasing profitability while preserving risks is possible only by introducing new, more profitable rules into the strategy (modernization and optimization).

How can the risk be taken into account when calculating a position size? What is the difference between methods of work on spot and futures markets? About this and much more you will learn from our next article.

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Telegram channel of the author - https://t.me/edkhan_cryptogallery