Trading Risk: Enhanced Profitability through Risk Control Review

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(More customer reviews)In his book Trading Risk, Ken Grant draws upon his experience as a risk manager for Tudor Investments and SAC Capital to create an insightful and surprisingly non-technical guide for traders and portfolio managers. As Director of Trader Development at a large proprietary trading house, I have been impressed with the role risk management plays in the success of the firm and its individual traders. Moreover, this is a scalable difference: risk management very much impacts the outcomes of individual trades, results of trading days, and performance across entire quarters. Where I believe Grant has admirably succeeded is in documenting that risk management is much more than simply "cutting your losses". Trading Risk systematically breaks down elements of the process of managing trades, from the establishment of concrete objectives to the allocation of risk capital to specific trades and the use of correlation analysis in evaluating trading results. His discussions of adjusting portfolio exposure and evaluating the risk components of individual trades are highly practical and encourage a rigor of self-analysis that is rarely practiced.
Perhaps an example from my own work with traders that overlaps Grant's ideas might be illustrative. I encourage traders to keep a log of all their trades that tracks time of day, position taken, position size, holding period, and profit/loss (P/L). Changes to the position are also documented, as traders scale into or out of trades. From this record, we can evaluate a host of performance statistics, such as position sizing as a function of market volume/volatility, the correlation of profitability with trade size/holding period, and patterns of activity within the trading day. While Grant's background is with portfolio management-appropriate to a manager who is holding a basket of positions in a variety of equities-his ideas are easily adaptable to the intraday trader who is trading a single instrument. By viewing each trade during a day as an element of that day's "portfolio", we can ask important questions about the mix of position sizes, overall directional bias, and the management of volatility as a function of trade capital/loss limits.
Written in an engaging style with bits of humor interspersed, Trading Risk ends with a practical chapter that summarizes the book's major points. He explains the importance of developing and modifying trading plans, defining one's trading "edge", judiciously allocating risk capital, and improving performance "at the margin". This latter point is a particularly neglected element in risk management. For the active, large trader, the ability to squeeze the extra tick out of trades is frequently the difference between a winning day and a losing one. Superior traders have an ability to read the very short-term patterns of price change and momentum to determine when it is prudent to hit the bid or let the market go offer in exiting a position. At such points, good risk management and good trading are indistinguishable.
I have few reservations about Grant's book. A text of 250 pages is not going to provide many workbook-like examples, something that would help the more mathematically challenged master the ideas of value-at-risk and correlation analysis. Small retail traders who trade only occasionally will probably find the risk metrics less compelling than larger, active traders or portfolio managers, though the basic principles emphasized in the last chapter certainly apply to any serious trader. Considering the absence of serious discussions of risk management in the popular trading literature, Trading Risk is a major contribution and a worthy addition to a library. I plan to use it as a core reading in our training program for new traders, perhaps the best endorsement I can give.


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Revolutionary techniques that traders can implement to improve profits and avoid losses
No trader, professional or individual, can afford not to have a solid risk management program integrated into his or her trading system. But finding a precise mathematical model to replace subjective decision-making processes is a challenge. Traditionally, risk management has focused solely on loss avoidance, but in Trading Risk, hedge fund risk manager Kenneth Grant presents some-thing completely new—how to manage a portfolio to minimize risk and increase profits by putting more capital at risk. Trading Risk details a risk management program that can help both money managers and individual traders evaluate which elements in a portfolio are working efficiently and which aren't. By illustrating an extremely simple set of statistical and arithmetic tools this book can help readers enhance their performance in many financial markets.
Kenneth L.Grant is Cheyne's Global Risk Manager, and is the Managing Member for Cheyne Capital, LLC, the firm's U.S. arm. Mr. Grant is a pioneer in the field of hedge fund risk management and capital allocation. Before joining Cheyne, he created risk control programs at two of the world's leading hedge funds, Tudor Investments and SAC Capital, where he was eventually promoted to the title of Chief Investment Strategist. Mr. Grant holds a Bachelor of Science in Economics and Mathematics from the University of Wisconsin, an MA in Economics from Columbia University, and an MBA from the University of Chicago Graduate School of Business.

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