Martin Kronicle

After reading this post, I went back to Jack Schwager's Market Wizards and re-read the interview with Larry Hite. It seems that Larry Hite is more focused on risk management than anything else. How much of a role should risk management play in one's trading strategy? In addition, what are some examples of risk management for a proprietary trader other than cutting losses short or sitting on one's hand's when there is too much volatility in the market?

Great question.

Risk Management is all you should be thinking about, especially if you
are a new trader or you are launching your CTA. Risk Management comes
down to position sizing. You'll find out (the hard way) that most of the
time you take a bigger than expected loss, you'll always regret the size
of your position, more than your basis.

/Set-ups/, as they are called, sell magazines and grab blog headlines,
but you should focus 100% of your efforts to being able to define your
risk at any given moment, than how to enter a trade. The minute you
cannot define your risk, you should go to cash. Only bad things can
happen at that point.

Larry Hite said it in his own works in /Broke: The New American Dream/:
“I start with the one thing that I can know. How much I am willing to
lose on a trade.”

One thing you can do to minimize risk would be to cut your position size
by a certain percent as the volatility increases. For example, you might
have a rule that states “cut position by 25% or X # of contracts if the
ATR (or volatility measurement) increases by 20%.” You can test the
percentages and see how they affect your equity curve.

Great question.

Risk Management is all you should be thinking about, especially if you
are a new trader or you are launching your CTA. Risk Management comes
down to position sizing. You'll find out (the hard way) that most of the
time you take a bigger than expected loss, you'll always regret the size
of your position, more than your basis.

/Set-ups/, as they are called, sell magazines and grab blog headlines,
but you should focus 100% of your efforts to being able to define your
risk at any given moment, than how to enter a trade. The minute you
cannot define your risk, you should go to cash. Only bad things can
happen at that point.

Larry Hite said it in his own works in /Broke: The New American Dream/:
“I start with the one thing that I can know. How much I am willing to
lose on a trade.”

One thing you can do to minimize risk would be to cut your position size
by a certain percent as the volatility increases. For example, you might
have a rule that states “cut position by 25% or X # of contracts if the
ATR (or volatility measurement) increases by 20%.” You can test the
percentages and see how they affect your equity curve.

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