Black box trading is a derogatory term that many people use for successful traders. Some people don’t understand systematic trading so they ridicule the systematic trader. Let me give you an example.
A few years ago, when oil ran up to $100 dollars per barrel in 2007/2008 there was an outcry from the politician. What was the cry? The cry was that it’s the speculators driving the price. The word hedge fund was thrown around a lot. That word was considered a bad word by many. When an oil crisis comes or when a crisis like that comes do the politicians ever look at themselves?
Today we are going to talk about trading risk. What is trading risk? Risk can be how much you are willing to lose or it could be how much you are willing to put up on a trade. How do we determine how much to buy and where our stops should be? First let’s talk about stops.
Trading Risk: Stops
I have back tested good systems with many data points. When a trader risks more than 2% they are getting in very dangerous territory. Let’s do some examples.