In today's article we would like to wrap up all the important things that we have learned in trading in the last few years. So let's get to it!
1. Risk management and positive RRR
The edge in the market doesn't last forever. Strategies fail in time (even though some may work for years), markets change faster than they ever did before, and drawdowns were, are, and always will be present. Therefore, the question is - what is the best way to deal with that? These are all aspects that need to be resolved on a risk-management level and not on the level of brokers, servers, and strategies.
From our point of view, the most important thing is to create a concept of how to look at money management as a whole. Our elemental approach is based on the philosophy that each strategy in a portfolio is like a single employee in a large firm. And the point of managing such a firm isn't based on the fact that each employee should receive the same part of the firm's resources (same percentage of capital), but each employee should have dynamically allocated resources based on how they are doing; how effective they are, and how they are contributing to the firm as a whole. Therefore, our risk management is based on a very dynamic real-time evaluation of actual effectivity of all the "employees". That means, not only from a point of view of their singular effectivity, but also from the viewpoint of their functionality as a whole. Based on such evaluation, different resources are allocated dynamically to each "employee" in time.
In such a model of management, it is important to consider many different aspects, from analysing the quality of each trade, the distribution of the latest ones, as well as of all existing trades through different analysis of equity, volatility, and current quality of markets. The model is therefore very dynamic and literally it can change every minute the distribution of resources to each "employee" and also the whole firm.
The main motive for which we have written this very blog is it’s really very important to have a clear idea of how to manage the capital. You don't need sophisticated models if you don't plan to manage big money, but if you are a small "ordinary" trader you have to know what percentage of the capital you risk per trade.
We strongly suggest to trade with positive RRR. From our personal experience - it is easy to find a beautiful, smooth equity with negative or RRR 1:1, but later on commissions and slippage come in and cards radically change in your disadvantage.
Also, I suggest to visit kifstradecapital.com, which I used to get inspiration for my fund.
2. Regular maintenance and adaptation
From the experience that I have gained over last few years - whatever edge in the market you have, whatever approach and trading path you have, your edge will need occasional changes, updates, and maintenance.
Some changes are changes in stop-loss and exits (better adaptation to new volatility); sometimes it is regular optimization; sometimes small changes in a fundamental idea of the edge. Occasionally, some of this work will be done by auto-adaptive requirements and algorithms on your behalf. But even so, some different levels of regular maintenance will be needed.
A definite edge that you could trade without any changes constantly doesn't exist. Markets are changing too quickly and therefore it is necessary to make adequate changes in parallel. Occasionally, it is necessary to change the composition of the portfolio; occasionally to change a market or timeframe, or to change the amount of positions thanks to the ever-changing volatility. These are all things that come with experience and are very important.
If you would look at this from a different angle - it is like in any other profession in life. Whatever you do, new trends, new tools, new requirements are constantly coming in and we need to learn to adapt. If we don't, we can't become successful in anything in this dynamic world (not even in trading).
The good thing is that it isn't as bad as it may look. Simply put, it is important to trade and gain experience, to reconcile that we will never be perfect and occasionally we will make mistakes - to learn from them. The more as we trade, the simpler it will be to make a decision about occasional changes to be able to adapt. Not always will our decisions be correct, but that's how it is in life (if we are reasonably diversified, the occasional wrong decisions will be balanced by series of good decisions. In our fund we are dealing with volatility a lot and on many different levels; from regular optimizations of systems to proprietary auto-adaptive algorithms and indicators, up to concepts working with adaptability on the level of the whole portfolio.
The necessity to know how to adapt is an elemental part of survival in life. This is actually great news because it means that in our genes there is everything necessary for us to adapt. We just need to learn how to use it.
3. Learning is a never-ending process
Trading is a lifestyle, it is a life path. If you have chosen trading, and I mean really chosen, then it probably will be with you for the rest of your life. And that means that there will always be something to learn, there will always be something new. And this is something that makes the path of a trader even more exciting.
To be honest, I have a feeling that I still don't know much even after more than 5 years in trading. Yes, I have noticeably moved forward. Trading is still a path without certainties. There is always something to learn. Every day we are amazed by new findings that need new, creative thoughts and ideas to be able to implement them in the right way. In trading there is always something to improve.
And that's how it's probably always going to be for traders. This is a reason why you need to enjoy trading, why you need to be passionate about it in order to be successful for the long run.
Try to approach trading also with an open mind and not only from a logic point of view. That would be a mistake as trading needs logic, heart and creativity.