Change in tone...new definition of risk

I took advantage of yesterday's lull in the market to trade some currency in order to fund my US trading account. Friday's CDN to USD was low and I like buying US when it is cheap.

My plan, which I keep saying is cashflow over return, needs to be solidified and I took the weekend past to do some thinking along these lines... which led me to today's decision.

RISK is putting on the line that which I am willing to lose in favour of the chance to make a gain. This is what trading is all about... speculative or otherwise.


ABSOLUTE RISK is the total dollar amount that is at risk at any given time on a per trade or account basis, I always called this the Maximum Loss Allowance (MLA).


REWARD TO RISK RATIO is the ratio of possible reward over absolute risk. I used to like 3:1, possible win of 3 times the amount risked. I turned this on it's head lately though...and then some.


RISK LEVEL is the chance of a trade creating a loss. Tough one to determine


WIN RATE, this is the toughest part of the whole thing, nailing down what the win rate might look like. Classic rates are in the 60% minimum range for typical trading in order to make profits.


Classic trading uses risk optimization based on the account and individual style to minimize the absolute risk (MLA) at times when it appears the risk to reward is 3:1 or better and the odds of using that MLA are smaller. Larger individual wins can skew the risk needed for future trades. Quite a dance, lots of fun though.


I have turned this over and created a whole other profile.


ABSOLUTE RISK remains similar in it's definition, that cannot be changed as dollars risked are dollars risked no matter how it is spun. Now the amount of risk per trade is much larger though.


REWARD TO RISK Going form a classic 3:1 ratio I now am in the 1:12 to 1:19 range, quite a change in numbers, but it is the rest of the risk profile that determines the real factors at work here.


RISK LEVEL. I feel that these trades as a close to risk free as can be had and still garner a decent return on risk or on investment.

WIN RATE...the real clincher here. I have run strategies that have had very good win rates and a few that have had poor win rates. This current strategy has it's very nature in sync with the idea of a high win rate due to two factors.... opening a trade puts cash in the account immediately...it's easier to keep than to make... and 75% of options expire worthless which is a 100 % profit target achievement for sellers. I expect just under the 100% win rate mark.

Tie this all together and I end up with a very different looking profile of what risk means to me.

Rather than a risk of losing capital I am now at risk of not having capital in the game, this is a higher risk then the old school absolute risk. Shorter timelines let me roll trades over quickly while maximizing the time that the cash is active. Placing a 30 day trades for 1.3 points profit (about $250) compared to placing a 45 day trades for 2.0 points ($372) works out to the same long term result. 15.8 net points at year's end or $3950.

45 day trades don't work anyway as when a 45 day trade expires it will not be an even 45 days for the next trade. using a 100% "in the game" approach can be on 30 day trades or 60 day trades...some sort of rolling forward method aiming for longer term trades will force me to be skipping weeks at a time while aiming for the short game.

So, given the high expectation win rate, the reversed and skewed return ratio and the idea that risk is more a missed opportunity risk than a capital risk, generally, my trading plan has shifted substantially from where I thought I would have been after 2 years.

Jeff.