I mean, do I really know my risk?
Stocks and Futures traders like to talk about how they use stop-loss orders to define their risks, and that’s smart.
A lifetime ago I managed a small, independent hedge fund that traded commodities with a trend-following strategy. This strategy entered positions that I’d attempt to hold for weeks or months (if they were working).
Every position I had on had a resting stop-loss order working in the market, giving me comfort that I knew the most I could lose if I was wrong.
All that comfort I was enjoying changed one day after a trip to my clearing firm’s office in downtown Chicago.
I sat down with one of the firm’s risk managers for a simple “get-to-know-you” chat. He was curious about my trading and just wanted to get to know me a little better and see if there were any ways in which he could help me get to the next level.
We got into the weeds of my trading strategy and he was nodding along in agreement that he was in favor of what I was doing and he thought the returns I was earning were impressive and better than average for accounts of similar size with that firm.
When we got on to the topic of how much risk I was taking in each position, I had my riff on position sizing and trailing volatility stop-loss orders ready to rip.
But then, mid-speech, he interrupted with a show-stopper: [Read more…]