Trading and risk

Trading and risk are never inseparable.

Any transaction will change the risk of a position. For example, a stock position, such as the closing of a stock index futures, such as selling one-off options. Wait a minute. When the action is done, the risk status of your total position changes immediately.

For successful transactions, risk must be modeled. In the option this is the Greeks decomposition of the price differential, which is the Barra multi-factor structural risk model in the quantitative investment, which is the margin of safety in the fundamental investment.

Purely technical analysis-dominated transactions are often incomplete. Because purely technical analysis of the risk of the portrayal of common sense can be known to be incomplete-unless you believe that the behavior of the risk of a complete description of the factors. But not that technical analysis is useless, sometimes ignoring the risk profile of market behavior is not an option, but a more scientific approach is to include it.

The definition of a successful transaction is that after a series of transactions, the theoretical profit or loss is positive (or the proceeds are positive) and the risk is controlled sufficiently small.

Risk-free arbitrage is an extreme case of successful trading, after a series of complex operations, to obtain a definite theoretical gain (or to achieve the proceeds), and the risk is not changed before the transaction.

Most transactions are risky, but the risk is controlled relatively small after a series of operations have been made.

This is the margin of security for fundamental investments, which is equivalent to buying an option that is much cheaper than intrinsic value. But this practice is still risky, and sometimes it is often the risk of delta-one. So measuring is not a good deal, it depends on how much theoretical gain is compared to risk. If the price is just about the same as intrinsic value, it is not a good deal unless you can make the right hedge. As a result, hedging can still be made on fundamental investments. If assets are indeed undervalued, buying boldly and doing hedge, the margin of security is worth earning.

So the core issue of successful trading is three things:

1, clarify the source of risk (establish risk model, such as Black-scholes,barra SRM, etc.)

2. Observing potential profits

3. Calculate whether the risk after the completion of the transaction is better than the profit

Any successful transaction through the ages can be said to be the combination of the above three steps.

Otherwise, you're just gambling.

Trading and risk