This article (link below) isn’t [I]really[/I] an article.
It’s by Nassim Nicholas Taleb (trader, among other things) and is his introduction to the recently published memoirs of Ed Thorp (author of “Beat the Dealer” and “Beat the Market”).
It isn’t actually called “Risk Management”. It isn’t even subtitled “Risk Management”. I’m not sure it even contains the words “risk management”, specifically, anywhere. But it’s directly or indirectly about trading … and that means it’s definitely [I]about[/I] risk management.
Risk Management, is the most important matter to be taken care off. You need to understand that properly, else you won’t able to survive in the long run.
I really liked the way it highlights two very distinct, but intrinsically entwined, aspects of trading.
The first aspect is the need to develop an edge, i.e. a method/system that identifies when the probability of success is suitably high in one’s favour. In this example, at the Black Jack table, using a tally system to numerically count and indicate whether the majority of cards so far have been strong or weak, is brilliant in its simplicity and is surely an effective guide to the odds of winning.
But it doesn’t stop there. He also exposes the essentiality of applying the second aspect, money management, to the edge - or as it is put here: Having an “edge” and surviving are two different things: the first requires the second. At the Black Jack table: “bet larger when the number is high, smaller when it is low”.
He then also highlights how these two aspect also impact one upon the other:
" you start betting small (a proportion of initial capital) and your risk control controls your discovery of the edge. It is like trial and error, by which you revise both your risk appetite and your assessment of your odds one step at a time."
Risk/money management is meaningless without an edge to one’s method, but the effectiveness and development of that edge only becomes observable with effective risk/money management…
