Risk Management

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Transcript Risk Management

Risk Management
What is risk management?
I discovered there are many types of
risk management.
Financial risk management
is the practice of creating economic value in a
firm by using financial instruments to manage
exposure to risk, particularly credit risk and
market risk. Other types include Foreign
exchange, Shape, Volatility, Sector, Liquidity,
Inflation risks, etc. Similar to general risk
management, financial risk management
requires identifying its sources, measuring it,
and plans to address them.
Financial risk management can be qualitative
and quantitative. As a specialization of risk
management, financial risk management
focuses on when and how to hedge using
financial instruments to manage costly
exposures to risk.
(source: http://en.wikipedia.org/wiki/Financial_risk_management)
Identify It’s Sources
• proven system with positive expectancy
• greeks
– delta - price
– gamma - price and time
– theta - time
– vega - volatility, beta
– rho - interest rates
• liquidity
Identify It’s Sources
• product (read the prospectus, LLC income tax
K-1 form for UNG)
(read http://www.vantharp.com/Tharps-Thoughts/572_Apr_11_2012.html)
–NAV (Net Asset Value) (-IV .IV)
Identify It’s Sources
• events
– earnings
– news
– company or broker mis-management (MF Global)
• leverage
• margin
Measure It
TOS analyze tab, trade tab
SEC reports 10-K, 10-Q
analyst reports
news stories
your trading records
Manage Exposure to Risk
• money management
– position sizing
– use stops - "your first loss is your best loss" Rozycki
– hedge with options or futures
– capital allocation
Manage Exposure to Risk
• portfolio management
• diversification
– class - stock, option, future, forex
– sector
– market cap
– beta
Manage Exposure to Risk
• directional risk (have both long and short
positions, or bonds and stocks)
• loss limits
– daily, weekly, monthly (Merlin Rothfeld $250 per
trade $500 per day limits)
– Alex Elder 2% per trade 6% per month
Manage Exposure to Risk
• trade execution errors
– continually learn and become proficient on your
trading platform
– know how to contact your broker and what
information they will need
• trade management
– from order fill to close of trade
Manage Exposure to Risk
• personal psychology
– health
– mood
– relationships
– stress
– environment
– recent large loss or win
Manage Exposure to Risk
• equipment
– computer
– back-up computer
– internet
– back-up internet
– list of positions on paper in case of power outage
Plans to Address Risk
business plan
trading plan
trade log
trade journal
risk management plan
trade management plan
Plans to Address Risk
• personal management plan
• review plans- daily, weekly, monthly
• "plan for every conceivable contingency" - Joe
• you are responsible for everything, so plan for
Why Use Stops?
• prevent a large loss
• protect a profit
• enter a position
Types of Stops
• stop market
– prevent loss
– enter a position
• stop limit
– enter a position
Types of Stops
• time stop
– prevent loss (option expiration)
– maximize capital (opportunity cost)
– enter a position at best time of day
• trailing stop
– protect profit
Where and how to determine the best
price level for stop placement?
• at a price where your original trade idea is no
longer valid
• beyond demand (support) or supply
(resistance) zones
• beyond highs or lows
Where and how to determine the best
price level for stop placement?
• at specific profit points (75% rule – Vadym
• a percentage of the ATR - volatility stop
• away from round numbers or specific
indicator levels
Are stops always necessary?
• No
– a defined risk option trade
– a properly hedged position
How do you determine where to
place stops?
The End