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

WHY USE A DATA-DRIVEN APPROACH?

Anyone in the trading jungle knows that a comparison is often made between trading and gambling. This book looks deeply into this analogy and discovers the statistical principles are, in fact, quite similar. When I first mention a risk-based approach to stock, futures, or options trading to the casual investor, the words “risky” and “gambling” often follow. Using a mechanical method to trading supported by a statistically strict data-driven approach often invites even more questions.

“You really don't care where the market is going?” “Don't you want to beat the market?” “Isn't that a bit boring?” “Is that what you do all day?” My response to these alleged market-predictors is, “I don't find winning boring at all. I execute my plan when I have an edge. All the rules are in my plan. What I do is execute my plan with precision just like a project manager building a house or a homeowner mowing the lawn. I'm not concerned about beating the market. I just focus on executing winning trades, and I only execute when I have a better chance of winning than losing.”

There is a certain level of pride when so-called traders talk about their success in predicting market movements. Anyone can do it for a time without any charts, data, or trading experience. You have about a coin-flip chance of being right, and most just hype the few successful predictions over and over again. There's no pressure for them, of course, since most of the time there isn't any hard-earned ...