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The Art Of Risk Management: The Path To Performance Measurement

Volatility is inherently a market risk. It plays into your hands, then lays waste to all your plans, like water that can both nourish, and destroy. Risk management is an art that directs the process of portfolio management in the right direction. The rules of risk management are often neglected on days when everything is fine, when the market moves according to forecasts. But should a tendency change, and every attempt by a trader to fix something falls under the definition of too little too late.

…your success in terms of risk management will be determined by your desire and ability to effectively adjust the contents of your portfolio so that it serves the purpose of controlling risks and preserving capital, and from time to time this will go against the actions that you would made, are you not limited by the limits of your ability to incur losses.”

Kenneth L. Grant

“Trading Risk: Enhanced Profitability through Risk Control”

The Discipline Of Exchange Trading

Risk management has two aspects. Firstly, it is discipline in exchange trading, and secondly, it is the assessment of the part of the value that a portfolio can lose. At the heart of risk management is mathematics, and the main task is to determine how strongly market volatility threatens the value of a portfolio.

Cold headed planning (setting goals, trading strategies, analyzing profitable and unprofitable transactions) is an important element of risk management. Successful traders conduct a comprehensive analysis of the asset at the beginning of the trading day for example, which includes:

  • Analysis of the movement of the pair on different timeframes;
  • Construction of trend lines, support and resistance levels and the channel on the chart;
  • Identification and fixation of the three nearest support and resistance levels;
  • Building of indicators used in the framework of a trading strategy on the chart (indicators provide evidence of intentions formed from the analysis of the chart).

Risk management and proper portfolio management imply a struggle for each item. In this regard, it is important to choose a specific opening point, an expected goal, and to outline the closing price of a position at a loss when analyzing a pair. If the expected profit does not exceed the intended risks, it is not recommended to open a position.

The creation of a trading plan should be followed by its implementation. Following the logical principles and building a strategy “on paper” saves the trader from making emotional decisions. Keeping a diary helps a novice trader to answer the perennial question – “Why did this happen?” And helps avoid mistakes.

Life is more risk management, rather than exclusion of risks

Walter Wriston

Comparison Of Successful Periods

One of the most important methods for diagnosing a portfolio is comparing decisions regarding the composition and structure of a portfolio during periods of sustained success and in periods when all is not going well. Such factors as the dependence of the trader on the news background, specific market orientations or simple luck are taken in comparison. Often, traders rely on forecasts made by other market participants, which by and large can be called financial negligence, which often leads to disastrous consequences.

These statistics are a general diagnostic tool that allows traders to highlight aspects that can be improved. However, one should not make hasty decisions and remove things that may seem to be weak links. A change in one factor may entail an undesirable change in the whole chain.

For a proper assessment of indicators, it is necessary to establish some reference indicators, one of which is time.When describing performance analysis using time series, Kenneth L. Grant notes the need to identify an adequate time interval, within which the used indicators are evaluated, as well as the definition of the unit of time that would give an idea of ​​the particular value of the indicator.

  1. The unit of time is the time during which specific gains or losses are observed.
  2. The time span is the entire evaluation period consisting of individual units of time.

The day is one of the most convenient units for analyzing profit or loss indicators. The day provides the maximum number of observations at any time interval, which in turn affects the level of accuracy of statistics. The week can be used, if for some reason it is impossible to observe statistics within each trading day, and it is recommended to use the week as a unit. For the cryptocurrency market, which is open 24/7, this unit is the largest allowable.

Analysis of the profitability of trading sessions will allow traders to identify the values of the PnL, which will later help better assess performance and set adequate goals.

In his book “Trading Risk: Enhanced Profitability through Risk Control”, Kenneth L. Grant called risk management an investment “And here is my good advice for the future. The next time the “invisible hand” of risk management finds its way into your possession, just do as I do in such cases — close your eyes and repeat many times over: “This is an investment. This is an investment,” and wait until the income starts flowing.”

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