16 Feb | 2020
Daviano

Trading risk Management

An unusual perspective for asymmetric Rewards

 

We have all heard the words #risk and #management. Maybe in uncorrelated contexts or perhaps not, but in a layman's way of speaking, #risks represent nothing more than the opposite outcome of what we expect to happen in a specific situation.

For instance; let's say you have an insurance policy provided by an insurance company. If this is the case, you must know that they (the insurance company) are experts in risk management, and that's one of the reasons of how have they built an empire; among other things for sure...

Learning to manage risk like a pro, is literally the key to making big money.

And somehow, we kind of all know how to do it already in non-monetary contexts like having a surgery for example...

If you have participated in a surgery (either as the patient or the surgeon), you must know that there were risks associated with that event, meaning there were possible scenarios where the outcome of the surgery could have taken the opposite direction of the expected or desired results.

Now I'm going to provide a monetary example, perhaps my favorite one...

Going into a casino...

If you go to a casino, you must know that they actually do know how to manage their #downside. Actually, casinos don't need to be very smart to do so, since their edge comes not from them being smart but from their clients being dumb and having Expected Value (EV) working in their favor, which is what successful #trading is all about.

No matter if you're a trader, a doctor, a lawyer or even a homeless person, if whatever you do in life involves in any degree a decision making process, then risk management is perhaps one of the most important skills you should learn in your life.

Unfortunately for a lot of people, they don't teach risk management in school and therefore it's kind undervalued, but anyway... Even if you just ask someone to go on a date with you, there are risks associated (yes, emotional risks exist too); actually in this particular case there might be more opposite possible outcomes of what you want to experience from the experience of inviting someone to go on a date... I guess that is why emotions don't usually help while calculating risks; but always remember, for every risk you take, there is always a Reward.

This word is as profound as the existence (or non-existence) of existence (or not) itself. Rewards are what drive things to keep forward (whatever that means)… In a way, #Rewards serve like the fuel for #progress, I mean think about it. A Reward is basically the fulfillment of a specific #desire, and desires are what drive everything you see (and many things you don't) into fulfilling their own #needs… Yes… I know this sounds crazy; I mean, how come something like a rock could have desires? You may be asking yourself, and well, they do, it's called gravity, but this is not a "cosmological" or "esoteric" post. It is in fact the exact opposite. This post is for me to explain the importance of #RiskManagement in a practical way, and believe me when I say that once you understand the words "risk" and "Reward", you'll see everything (and I mean literally EVERYTHING) in a different way, and more importantly, you'll act in a different way and make better decisions (which in a way are the basic blocks of your own "reality"), because on its most #fundamental level, life and existence reduces to the interaction of probabilities, and even though this concept might actually sound a bit esoteric and hard to grasp, it really is very simple. At its core level, everything you perceive as existing stuff, can be understood with a statistical logic as the following example:

Let's say X  has a greater probability than  Y  to cause  Z. Then, with the Necessary Time (DON'T FORGET THESE 2 WORDS) and several #tests (often called #trials),  X  will indeed cause  Z more often than Y does.

The example I just described is #hypothetical; however, it certainly exemplifies how Expected Value works, and this is the exact statistical framework used by casinos to have an #edge over their clients and beat them the majority of times, it might be a good idea to explore further and maybe even master the art of using EV to not only make more money but also to make more positve experiences and therefore creating a better life for yourself, because at the end of the day, life is just the sum of experiences, but like I said, for this causation to be even caused, you would need a Necessary amount of Time ...

Why?

Because Time (in conjunction with space) is what allows events to happen. Without Time, events could not happen, and without events happening, we'd never be able to measure nor expect any result of any kind ... And the more Time we have running in our favor (relative to the Time needed for a specific outcome to happen) the more for probabilities for EV to make its magic.

So, I know this was indeed a bit of an esoteric blog post, I mean, I just mentioned the word “Esoteric” for the third time (and now fourth) but hey, this is just a way for me to welcome traders or future traders to Traderbook, and show you guys that achieving #consistency and #profitability as a trader is not much different from casinos beating more than 90% of their clients (if they can even be called that way), or for the solar system to exist; I mean, if you've read Stephen Hawking, you'll know there's a chance that the existence of our universe is just a matter of #chances, and for it (our universe) to exist there were probably trillions of trillions of trillions (or MUCH more) of attempts for the circumstances needed for a universe like ours to come into existence “before” the Big Bang, and I put a quote-on-quote on the word "before" because Time (and Space) actually came into existence just at the "moment" of the Big Bang, and it is funny to see that after billions of years in a small and blue planet called earth, it's habitants found a way to potentially autodestroy themselves by trading Time.

Yes, there's a way to trade Time with Options, but I am definitely not going to go there today, even though I want… I really want… But no. No talking about Options today, no, no, no...

Maybe tomorrow ...

Yes, there's definitely a chance that I'll post about Options Trading tomorrow.

 

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