Managing Risk Is Managing Your Track Record

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The grain market has been literally and figuratively on fire these past 2 trading sessions. As I’m writing this, December Corn is up 45 cents – and this is after being up 30 cents on Friday. That’s 75 cents or almost $4,000 per contract.

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November Soybeans are up 47 now after being up 70 cents on Friday. That’s over $5,000 per contract.

How much of these gains are you willing to take?

Over the last few weeks I’ve written about managing portfolio heat and I created a tutorial video on trading gold.

When you are out marketing your track record, allocators will ask how you handled this period in time. Telling them “I just followed my rules” is too general and you won’t build any trust with this statement. You need to break it down for them.

Another answer is “I saw unanticipated gains that came to me as a gift in a matter of a few days. I felt this was an outlier event that didn’t show it’s head in my hypothetical backtesting. I took some gains and MOST IMPORTANTLY I cut the risk and the volatility to my portfolio.”

When the market is on one side of the trade, everyone will be heading for the door at the same time. But if you are just starting out (5 years or less of a track record) managing risk is as much about managing your track record than for someone such as Bill Dunn for example. He already has everyone’s trust. You don’t. You need to earn it. And to put that into perspective, it will take 10 to 15 years before anyone is going to know whether your trading results are random or based upon skill.

Look at it from another point of view: You had gigantic gains overnight. You waited for an X-day low to get out and watched the gains recede faster than your hairline? Explain that to a client. They are not going to care about your rules when you’ve let gains slip through your fingers.

In circumstance like these, you have to pick a spot where you’ll be emotionally and financially stable by offsetting some of the risk. Sell some contracts and move a stop up to protect the majority of the unrealized gains. You can get back in. Most of the guys who made kajillions during gold’s big move in 1979 were catching large chunks of the move. That means they were in and out of gold WHILE IT WAS TRENDING.

Ed Seykota used to say, “your stop is the point at which you are willing to transfer the risk to someone else.” What is that spot for you?

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In order to get a feel for using options in turbulent times, listen to my interview with Larry Shover, author of Trading Options in Turbulent Markets.


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  • Hi Martin,
    How about having a system designed to handle these sort of scenarios – maybe with a risk management “module” that calculates heat/volatility across the different positions in the system/portfolio and reduces positions accordingly to meet a set risk/heat/volatility target?

    This way, it can be systemized (no interaction with emotions and can be back-tested)

  • Anonymous

    Why wouldn’t I want to interact with my emotions? I was a member of 2
    Trading Tribes (IV/LA) – one as Chief – so I look forward to feeling all
    my feelings while I trade. They are important allies to and for me.
    Stifling them would be catastrophic. Maybe your readers don’t trust

    Bill Dunn is an exceptional trader and human being. But so are George
    Soros and Victor Sperandeo and they trade nothing like Bill Dunn. As a
    teacher, I embrace all types of traders, not just
    systematized/mechanical traders.

    Lastly, I believe that there is room for specialization, where a trader
    can focus on one commodity or sector, and not run a model of several
    dozen commodities in a CTA-like platform. In that regard, they wouldn’t
    need a system either.

  • Interesting angle. I did assume that you were a system trader (+ you mention “backtesting” in your article).

    For myself, I know that I cannot trust my emotions (my past discretionary showed me that they are “counter-productive”at best) and this is a strong attraction to trade using systems… Have always been intrigued by Trading Tribes – maybe I should try and give them a go.

    Also I think it is easier to emulate Bill Dunn rather than George Soros, but obviously this is a personal point of view.

  • Anonymous

    Intentions equal results. I believe anyone is capable of anything.

    Backtesting a model is like using GPS: it shows you the route of how
    people could have gone…in the past.

    Whether you take that route today is a whole other matter.

    You don’t need a computer to run a “system.”