This is why I only trade options. You define the risk you want to take. For example a synthetic option at Delta 0.8 and a ATM put you know your worst case scenario. Bottom line is you don't get the direction right on the stock it's hard to make money.
Anyone else keep track of excess losses from ignoring stops? I print it out in a huge font size and keep it as a sign next to my screen. I know entire hedge funds have blown up and careers ended by refusing to take losses.
"The size of your position and where you put your stop loss should be proportional to how volatile is the underlying instrument and how volatile is the market lately"
Do you size your positions so you are risking the same $'s on each trade (based on stop level)?
Do you attempt to adjust position sizing based on the chances of a particular security gapping well below your stop level? For example, losing more than my stop is more likely in my long uranium trade than my short AUDUSD.
Re: rule #5, what is your position on utilizing volatility as proxy hedging and diversification? Is it as simple as indexing the s&p while also paying a VIX premium?
Interested to see if and how you would incorporate that. Thanks!
Hi Kyle! Generally, in a bull market you’d find VIX dropping or staying flat and when things turn ugly for SPX, VIX would generally increase. Despite that I’d caution against “proxy hedging” your long risk exposure via buying volatility. If you want to hedge something, the easiest way is to sell it. The second easiest way is to buy protection on the exact same underlying.
Just discovered this blog today. Hugely valuable content. I really enjoyed the Trading View video too, it was helpful to understand the macro compass in greater detail. Looking forward to your next posts.
Question, what does growth vs value mean in regards to secular stocks/top left corner of the compass? If I’ve understood correctly, it’s long growth (qqq/tech), is that the right way to interpret the top left corner of the compass?
With regards to watch out with diversification and proxy hedging: With options there is a better opportunity for diversification. Both TLT and GLD exhibit right tail skew. Even in March 2020 GLD and TLT recovered quicker than stocks. If you were running a dynamically hedged portfolio of stocks, gold and bonds using options you probably slept like a baby.
Hey Alfonso. The greatest damage comes from sticking with the wrong macro view. Even with disciplined stopping out and other good risk management techniques, it is psychologically very hard for most investors to admit that they read the big picture wrong.
I now use a fixed $ value max limit on any position..............after seeing fantastically good and terrible results from going overweight a position. I simply wanted to sleep better so I had to take down the impact that a single position could have on the portfolio.
Regarding portfolio size:
I've also started asking myself regularly: how big should I let the portfolio get in $ terms? It pays to review this basic question based on the purpose of your trading and how much of your assets you should have at risk.
This is why I only trade options. You define the risk you want to take. For example a synthetic option at Delta 0.8 and a ATM put you know your worst case scenario. Bottom line is you don't get the direction right on the stock it's hard to make money.
Long option strategies have this built-in risk/reward concept which is great, indeed.
Anyone else keep track of excess losses from ignoring stops? I print it out in a huge font size and keep it as a sign next to my screen. I know entire hedge funds have blown up and careers ended by refusing to take losses.
Yep, I do it all the times. You quickly realize it’s huge.
Bravo picciotto. Keep going with premium educational content
"The size of your position and where you put your stop loss should be proportional to how volatile is the underlying instrument and how volatile is the market lately"
Do you size your positions so you are risking the same $'s on each trade (based on stop level)?
Do you attempt to adjust position sizing based on the chances of a particular security gapping well below your stop level? For example, losing more than my stop is more likely in my long uranium trade than my short AUDUSD.
Re: rule #5, what is your position on utilizing volatility as proxy hedging and diversification? Is it as simple as indexing the s&p while also paying a VIX premium?
Interested to see if and how you would incorporate that. Thanks!
Hi Kyle! Generally, in a bull market you’d find VIX dropping or staying flat and when things turn ugly for SPX, VIX would generally increase. Despite that I’d caution against “proxy hedging” your long risk exposure via buying volatility. If you want to hedge something, the easiest way is to sell it. The second easiest way is to buy protection on the exact same underlying.
Just discovered this blog today. Hugely valuable content. I really enjoyed the Trading View video too, it was helpful to understand the macro compass in greater detail. Looking forward to your next posts.
Question, what does growth vs value mean in regards to secular stocks/top left corner of the compass? If I’ve understood correctly, it’s long growth (qqq/tech), is that the right way to interpret the top left corner of the compass?
Thanks
Thanks for the kind words! Long growth vs value would be for instance long Nasdaq and short Russell.
With regards to watch out with diversification and proxy hedging: With options there is a better opportunity for diversification. Both TLT and GLD exhibit right tail skew. Even in March 2020 GLD and TLT recovered quicker than stocks. If you were running a dynamically hedged portfolio of stocks, gold and bonds using options you probably slept like a baby.
Hey Alfonso. The greatest damage comes from sticking with the wrong macro view. Even with disciplined stopping out and other good risk management techniques, it is psychologically very hard for most investors to admit that they read the big picture wrong.
I do agree, Marco. That's why it's also important to stop one's ego out.
Regarding position size:
I now use a fixed $ value max limit on any position..............after seeing fantastically good and terrible results from going overweight a position. I simply wanted to sleep better so I had to take down the impact that a single position could have on the portfolio.
Regarding portfolio size:
I've also started asking myself regularly: how big should I let the portfolio get in $ terms? It pays to review this basic question based on the purpose of your trading and how much of your assets you should have at risk.
Hi Bruce! Having a risk management framework of any sort is already a big step ahead.
The $ value max limit on a position (refer above) would be 'a cost limit', not a 'current value limit'.
Can you elaborate? Not sure I follow.
Just mean that $10k original cost limit means I wouldn't add more to the position but that position could grow to $20k and not be trimmed.