Category Archives: Risk Management

Kelly Fraction and Leverage May Lead to Underperformance or Even Ruin

In this blog post it is shown that in the case of S&P 500 Index, use of the Kelly ratio has not provided protection to investors from large drawdowns and that use of Kelly leverage has led to total ruin. It turns out … Continue reading

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Market Risk: Principles and Practice

The longer a position is exposed to different market conditions, the higher the probability of an adverse event occurring but actual losses depend on entry level. In this article I provide a simple method for estimating the risk of a passive investor or trend-follower. Share

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Normal Volatility in S&P 500 Index, Still No Trend Reversal

The price action in S&P 500 Index is still within normal bounds and there is nothing yet to indicate that a trend reversal is in effect other than those articles in the blogosphere trying to convince investors of that. Usually such … Continue reading

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Practical Position Sizing Based on the Risk Ratio

In the blogosphere and elsewhere one can find many articles about optimal position sizing and on maximizing equity growth via the use of fancy math, like for example the Kelly ratio. Traders and investors should ignore such supposedly optimal methods of sizing … Continue reading

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When to Ignore Extreme Oversold Conditions

Gold has plunged to extreme oversold territory but unless one is very sophisticated with timing entries and exits and managing position risk, these technical reversal signals should be ignored. Extreme oversold, and also overbought, conditions can be quite misleading as market participants … Continue reading

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Naive Speculators Were Hit Hard

Speculators who rely on naive analysis of price action were hit hard yesterday. In the case of the DIA, HFT algorithms got the speculators both sides. In the case of TLT shorts were shaken out. This is how professionals make money … Continue reading

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Risk of Ruin For Dummies

A good percentage of  traders and investors get ruined because they are deceived into believing that they can be profitable in the longer term even if they are wrong more often than they are right provided they win multiples of what they lose, on … Continue reading

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