How do you know when to be aggressive and when to ease back?

Hello all,

I've been reading the book Market Wizards lately (great book btw) and one of the things that confuses me about these super traders is their money management strategies when they are trading aggressively. Some of these traders would trade very aggressively when they knew that they were in the right trade or when they knew a great opportunity was about to present itself, and they would take on huge amounts of leverage for that trade. As a result, they were able to generate huge fortunes relatively quickly (and losses in some cases).

However, the question that baffles me is that these traders also believe that you should never risk more that 1-3% risk with each trade (and that sometimes includes trades that are correlated as well). This is one of the golden rules of trading that these super traders live by, but if thats the case then is this 1-3% risk rule broken when traders purposely trade aggressively? - or is the risk still the same? - in which case how can one trade be described as more aggressive than the other when the level of risk is the same?

Perhaps I'm missing something really obvious here?

Thanks,

Pi

It's a good question and I have to think there are things they're not telling us.

I think it just comes with experience. By watching a particular instrument over several months/years, you tend to pick up on high probability setups and can be aggressive on trading them.

If you enter, and it is going your way. Then if you are skilled enough, you could move stops up and add more to your position, without increasing your risk on the initial capital beyond the 3%

Well, my only mention in Market Wizards is on the flyleaf with birthday wishes from my son, although I suppose I'm in there anonymously as the stooge who gets it wrong

Anyway, for me, trading aggressively is building a large (for me!!) position with additions when I reckon I've got a good thing going. "Normal" trades are much more passive affairs.

jon

amit1986 is bang on the money !

I got the feeling that they had built up their pots aggressively and have now eased off on the risk.

Shakone said:

If you enter, and it is going your way. Then if you are skilled enough, you could move stops up and add more to your position, without increasing your risk on the initial capital beyond the 3%

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This seems to be the way to go....but then you get into revising your risk reward ratios...even though your risk may be below the 3 % by adding and moving stops, your revised RR may not be worthwhile....

Prawnsandwich said:

This seems to be the way to go....but then you get into revising your risk reward ratios...even though your risk may be below the 3 % by adding and moving stops, your revised RR may not be worthwhile....

Click to expand...

This sounds like a good method, however, Im not so sure that the super traders used this specific method to trade aggressively because the book mentions that some traders lost huge somes of money when their aggressive trades went wrong.

Are we all in agreement that trading aggressively involves taking more risks beyond the golden 1-3% btw?

Pi3141 said:

This sounds like a good method, however, Im not so sure that the super traders used this specific method to trade aggressively because the book mentions that some traders lost huge somes of money when their aggressive trades went wrong.

Are we all in agreement that trading aggressively involves taking more risks beyond the golden 1-3% btw?

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Nope...thats not what we are saying - we are saying that you can increase position size while maintaining or reducing risk (within your original parameters ( 1-3% or what ever) by moving your stops up as the trade goes in your favour.

However, you should also take account of risk reward ie if adding size at a certain point reduces your potential RR below a certain acceptable level (eg 1:2), then it may not be worth doing so....

Another school of thought is that you should start a position below your normal full position size and then add to the position to get to your full size as the trade moves in your favour....

It's been a while since I've read the wizards books... haven't pretty much all of the wizards blown up an account or two? Sometimes, it doesn't pay to be aggressive.

"Sometimes, it doesn't pay to be aggressivek".

And sometimes it does,.....LOL ,. hopefully more times than not! : )

Half of them have blown up since it was published.

It's therefore not unreasonable to think many of them were only market wizards by luck anyway... and of course the easiest way to be lucky is to take too much risk. After the fact, the trades you took looked really obvious and so it was perfectly reasonable to risk far too much...

lipschutz is still strong and his currency fund has averaged 18% since the book was published, druckenmiller gave up but had 30 winning years so.... monroe trout reitred with around $1 billion net worth, al weiss is still around i think,not sure about the option traders, but i do know richard dennis had some nasty drawdowns and stopped trading