The Number One Job Of A Trader

Thank you for your replies to my question: What is the number one job of a trader?

Your answers tended to revolve around making money, managing risk, protecting capital and making positive risk-adjusted returns. Those are all good suggestions that make sense. I would add that in professional trading firms, acting in compliance with the law and regulations is an explicit focus as well.

I think the real answer is deeper. For me, the number one job of a trader is to be allowed to play the game again tomorrow.

Why? Because it is a probability game, and the only people who are right every time deserve to be in jail. Even when you have a good edge, the odds are that there will be reasonably long streaks when the dice simply do not land your way. It is important to develop an edge (a positive expectancy), but it is equally important to be in business long enough to capitalize on that edge.

Take the example of a weighted coin, where you win 2x your stake if it comes up heads, and lose your stake if it comes up tails. You have $100 to play with, and the game will be played multiple times. How much should you bet on each coin flip?

The answer is clearly not $0: this game has an edge (a positive expectancy), so you should be willing to play it. However, the answer is clearly not $100  either: there is a reasonable chance that you will lose on any given coin toss, and so you should not risk your entire stake on one flip.

Smarter people than me can work out the math of what the “optimal” bet size is for this game. In the real world, the game is murkier since you do not know what the odds are: you can only make educated guesses or rely on historical back testing. The important point is that you need to act so that you can play the game again. Betting too big so that you blow up before the positive expectancy can play out in your favor is a fatal mistake.

Acting in a way that stops you being able to play a positive expectancy game again means that you have failed as a trader. This covers everything from losing so much money that you blow up/get fired, breaking any laws or codes that get you banned, or sleeping with the boss’s wife: anything that stops you being allowed to play the game again tomorrow. It doesn’t matter how good your trade idea is, or how much money the trade is going to make next week, or how good your average win/average loss ratio is: your swipey badge thingy has to open the door to the trading floor tomorrow.

You need an edge to make money over time. But if you have an edge, and you act in such a way that you cannot exploit that edge, you have failed.

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  1. The Fisherman And The Hypothesis « thezikomoletter

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