In light of current market behaviour, what are some ideas on risk control? Someone is going to say Optimal F, or related, but here I was more thinking about what you do when flying by the seat of pants as always.

You can reduce risk by:

1. Staying out of market more (always?)
2. Setting stops (which get triggered right before huge rallies and increase probability of losses)
3. Trading small (too small to ever recoup losses)
4. Staying in only for prescribed short intervals (ensuring the miss of the rally a day later)

Ken Smith replies:

DangerI once concluded I should take the first option suggested by Dr. Zussman: stay out.

My idea was if I cannot predict then do not trade. But I often fool myself, thinking myself a magician, prognosticator of great moment. Under the sway of this illusion/delusion, I do not stay out and frequently prove myself wrong.

But the problem is I am frequently right. The balance between right and wrong has played out on the positive side for some time now.

You should know I do not have money to trade. I am advising without compensation, under a tacit marital contract. So when I am wrong I suffer emotionally more than if this coin of the market were out of my own pocket.

I suppose those knowledgeable about psychology, behaviorism, that sort of thing, will recognize this pattern as typical of some concept developed by the profession.

For me it means I have to risk going into the fog under steam and do so without radar, only a whistle blow to sound out what's ahead. Primitive tool. 

George Parkanyi writes:

Ken FisherAccording to Ken Fisher, the first 2/3 of bear markets are relatively mild. Typically the last 1/3 (about 6-8 months generally) is the brutal bit. If you think this is a bear market, we have approximately 12-18 months to go, with the worst yet to come. But is it a bear market? The nature of Dr. Zussman's question suggests uncertainty. If his anxiety has increased, then a good rule-of-thumb is reduce exposure (position sizes) until something more compelling, or some clarity, presents itself. He can always scale back up if the market suddenly starts going his way. No matter what the conditions, certain fundamentals and the tape should offer a few tradeable ideas in either direction. I think the risk-mitigation strategy should be whatever his methodology generally calls for. If his risk management approach is contingent on the type of market that he is in, by definition he's going to have to market-time successfully all the time or run the risk of a large hit. Best to have one consistent risk management approach for all seasons.


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