How do professional traders calculate and manage risk?

ebitdagod's picture
Rank: Monkey | 57

Whenever I watch or read interviews with successful traders they always stress the importance of risk management. How exactly do professional traders calculate risk (formulas etc.)? Are they simply looking at VAR or are there more advanced risk management strategies used by professional traders that day traders are unaware of?

Comments (6)

Jan 30, 2019

before you get into a should know what will make you get out.

price - moves against what price will you exit?
time - price does not move in your favor for x minutes/hours/days....when do you exit?
price action pattern...what price action will make you exit?

you need to know all these things before you enter a trade...or you should NOT enter a trade in the 1st place...because that's not trading...that's blind gambling. Trading is making educated bets with a statistical advantage. Blind gambling is not that.

just google're welcome

Jan 30, 2019

Like what face said... You need to know all your risk exposures... obviously if you're just day trader, trading only directionally, you have a delta risk but in that delta risk, how much are you risking? If the postion goes aganist you x amount, what will be your dollar loss? What is your P/L volatility? If it goes aganist you, how will you hedge it? You may not hedge it perfectly, but how can you mitigate the loss? Is it liquid enough?
You might get into a favorable position but will you get fucked when you unwind it down by a market maker?Why are you getting into the position? Are you getting in due to "feeling" or are do you have a defined strategy? Try to remove yourself from being subjective. If you have spread risk, do you have residuals, building up delta risk, as well? If you're trading the basis, whats your basis risk? Essentially, you need know all your risk exposure. If you're a small time day trader, obviously your risk will be a different from a big time prop trader and market maker. If you're trading oil, what are risk factors that drive the price of oil... obviously it will be different from natgas even though they're both energy. What I don't understand is people ignorantly trade a product they don't understand... like the time when XIV blew up and people had no idea wtf was going on

I mean when I'm trading spreads, I focus more on the front but let's say i have like 200 lots on the back but they don't move as much, but one day, they move 5 ticks aganist me and I'm like fuck. You need to see everything... maybe you want to hedge your delta into a spread, you get fucked and turn it in flies and maybe a condor but what about your margin... what about the duration of the trade? The flies might be good but it will take forever for it to play out depending on what you're trading and let's say you're a marker maker like myself who doesn't have a big balance sheet... have to get out of it... especially when I'm trading on multiple exchanges and they don't account the margin even though I'm price hedged. You always have to be 10 steps ahead... worst case scenario... is it a good risk? Is the liquidy there? Am i being subjective on a trade? What is my conviction and how long will you hold it? Emotionally, what are you ok to trade where your emotions won't get involved? You're not here to make a home run trade everytime. Consistency is the key to a successful trader.

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Feb 1, 2019

they have risk mgmt systems man.

Feb 2, 2019

Do you happen to know what calculations these risk management systems do?

Feb 3, 2019

in the case of options, risk system should report headline greeks + fly + skew exposures

in cash linear products, how much desk is long/short something.

in fixed income, duration/curve/fly... for credit, CR01 = pnl from 1bp move in credit curve.

in mortgages, prepayment risk and convexity (gamma) to level of interest rates...

seriously depends on the product but basically traders wanna know "if x happens in the mkt, my pnl moves by $y"

Feb 1, 2019

just google're welcome