The Risk of Trading: Mastering the Most Important Element in Financial Speculation

SUMMARY

There are so many market variables that come into play on nearly every trade. As traders, we need to take advantage of every numerical opportunity in the edge discovery process. Experienced traders often have an advantage in sampling since their history is large enough to generate a sample review size. When performing risk audits in the financial and corporate fields, I am required to adhere to specific accounting or similar standards when compiling my sample sizes. Failure to do so can immediately discredit my findings and recommendations. In trading, such rules can be a bit relaxed, especially for the individual traders who trade their own capital. Using a practical approach with strong sampling and audit principles is often best. After all, we are traders looking to profit from a detected edge. A paralysis by analysis over the top formula to determine the number of records you need to review should be left to the corporate-sector risk management teams. You will often be forced to sample data outside your personal trade history. Sample size theory will help in this regard, too. When reviewing chart patterns, price data, and technical analysis tools, consider the similar market conditions rule discussed earlier as equally if not more important that the size of the sample. As market conditions change, setups having edge will lose their luster while others start to appear. Results using perfectly valid samples will sometimes not show true in your live trading. Human and ...