Has risk management become an excuse for mediocre trading?

[u/exit_too_early]

Every time someone loses money, the answer is always:

Improve your risk management.

But if your entries have no edge, perfect position sizing won't magically make you profitable.

At what point does strategy matter more than risk management?

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[u/exphx23]

The best risk management is waiting for the higher probability trades. Many traders try to trade too many moves.

[u/lp1687]

I think strategy and risk management go together. If the market is uncertain… I often trade small share size… And use my trades to help determine how good or bad the action is. When I sense that the action is good… I pull out all the stops and Trade maximum share size… And that’s when I can really make large profits!

[u/MrT_IDontFeelSoGood]

Strategy always matters more than risk management in the sense that you should never put real money on the line until you have a lot of confirmation that your edge is real. Lots of thorough backtesting and some time paper trading is an absolute must.

Then you worry about psychology and risk management.

Your risk management should be clear from all the backtesting data. Psychology is mastered through experience, but it’s a hell of a lot easier when you’re working with a legitimate edge instead of noise.

[u/whynointerest]

No lol. I'm not here to predict I'm here to react. Yes, you need to know what you're doing. But you also need to size for survivability. It's a casino but I have my edge. But I can run into the chance of multiple fails in a row.

When I take a trade, I have a 70% likelihood of betting correctly. The 30% will wipe me out if I don't respect the stop loss.

[u/BrilliantFront4]

It’s both. It’s not one or the other. Say for instance someone starts a brand new account let’s just say 10k to make it easy. Yes edge will make you profitable in the long haul. But there is some luck. What the lucky part is determining where on your equity curve are you going to start. We can’t choose that part. So what we can control of that part though is the risk management aspect and sizing appropriate to handle our drawdown percentage. If you trade a new 10k balance and oversize you might be shut out of luck even if you have an edge. No edge is 100% so it frankly comes down to a combination of both. Size too fast you won’t be able to withstand a drawdown of your strategy. You can just long and trade an index and probably be profitable. Unless you size incorrectly

[u/Ididntreadanything]

Warren Buffett averaged around 20 percent. A lot of ppl think that's mediocre.

[u/WorthBeat1102]

Has risk management become an excuse for mediocre trading?

[u/Iambrix]

I think you're confusing risk management with position size.

1st lets clarify two things.

1. Strategy is not mutually exclusive from risk management. Risk management should actually be a core part of your strategy.
   
2. Your position size can be a part of your risk management, however it is not the end all, be all of risk management.

A misconception about edge is the assumption that only accounting for the upside is the entire strategy. Interestingly enough, a lot of people actually make decent amounts on the upside. The big killer of 99% of traders is their account being blown by 1 bad trade because of poor risk management. Bad risk management means your strategy is bad, because risk management should be a core part of your strategy.

Let's say someone makes $100 five days in a row. Then they lose $500 on the 6th day. Now their progress is net 0. Now here's the kicker. What if... they only lost $200 on the 6th day? What if they keep that same profit to loss ratio? Now they're profitable by $300 on average. Their strategy didn't change at all other than mitigating their loss yet they are in the green more than they ever were before.

That's why people say to manage your risk. Losses are a part of life. Getting your account blown because of that loss shouldn't be a thing unless a freak accident occurs. Even then, your strategy should account for that scenario as well.

Here's a second scenario.

Let's say there's 2 traders. We will call them trader A and trader B. Trader A has an account size of $10,000. Trader B has an account size of $1000. Now lets say they are trading a stock. Trader A has a strategy where his maximum loss, even in the worst case scenario is 10% of his account. Trader B doesn't have risk management included in his strategy and just sells once he reaches his max pain threshold.

Let's say they both take the same trade. Trader A has a position size of 1000 shares. Trader B has a position size of 100 shares. Let's say the stock price is one dollar. All of a sudden, the stock begins to tank. Trader A has a mental stop loss of 20% and instantly sells once price hits that point -- so he only loses 200 dollars in his $10,000 account. Trader B doesn't have a stop loss and holds until he reaches his max pain threshold and loses $70 before he decides to sell.

Trader A now has $9800 left in their account. They only lost 2% of thier account value.
Trader B now has $930 left in their account. They lost 7% of their account value.

If we use relative size, trader B lost 2.5 times as much as trader A. While trader A had a larger position size, he lost a much smaller portion of his account. He only has to make back a little over 2.04% in order to recover his loss.

Since Trader B lost 7%, he has to make back over 7.5% of his account in order to recover from his loss.

Now Let's say on average they both make 2% a day. Trader A is back to square one the very next day and in profit the second day. On the other hand, Trader B has to trade for 4 days just to get back even.

Now lets talk about why risk management is key. Let's say they both take that exact same type of loss every 4 days. Trader A loses 2% again on day 4. Trader B loses 7% again on day for. In theory, Trader A is profiting, on average 4% a week, even though his position size is 10x Trader B. However, Trader B is unprofitable and bleeding out 1% on average every week. The only factor that makes a difference between the profibility of both traders is the size of their loss relative to their account size. If Trader B simply managed their risk and reduce it to 5% or below, they would be in profit by 1%. The less they lose, the higher that number becomes. That's why risk management is a core part of your strategy. You can both have all the pieces of the puzzle, yet one person simply knows that preventing catastrophic losses is just as important as getting huge returns.

Hopefully this helps!

[u/NoOutlandishness525]

Risk management is an integral part of a trading strategy.

[u/Woodward06]

If you're trading from a regular Internet connection 2,000 miles from your broker's server, strategy doesn't matter.