3.2. LEARNING TO UPGRADE YOUR PERFORMANCE

Unfortunately, not all traders recognize the importance of risk management. As obvious as it would seem to be, many traders simply dismiss or undervalue how vital it is to success. Alex is one such trader, and his inability to manage risk is evident in his current frustration. He believes he could be bigger but has reached his limit on sizing (15 percent of his portfolio). He is also net long about 35 percent (also at his limit). He believes his volatility at 6 percent is not that high and that he is "right" even though he is in a huge drawdown. He believes that long term his ideas will be right and cannot understand why the firm won't hedge out his risk. I confronted him about this and strongly advised him to follow good risk management principles and try to keep his losses down to stay in the game. While he was very appreciative of the attention and support and appreciates the importance of risk management, he is still of the mind that the risk manager cannot understand what it feels like to trade ideas when you have done the work. I talked to him about establishing a template for assessing shorts from a stock-selection and risk-management viewpoint—combining fundamentals and technicals, looking for companies with bad accounting, low multiples (with high expectations), and smaller caps. In all this, he needs to learn to raise his threshold of awareness of what constitutes a good short and how to manage risk better. I indicated that it ...

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