Macro Wrap – Rather Than Good Luck, I Wish You Good Risk Management

After Bernanke’s dovish comments last night, a global risk-on rally has ensued. Here are the highlights of the major overnight price action (much of it taking place within a couple hours of Bernanke’s speech):

1) S&P 500 futures are up around 1% to 1667, about 10 points from the all-time high set on May 22nd. All major stock markets are higher around the world. The overnight chart of SPX futures:

2 day intraday chart of Sept SPX Futures, Courtesy of Bloomberg — 2 day intraday chart of Sept13 SPX Futures, Courtesy of Bloomberg

2) 10 Treasury Yields moved about 12 basis points lower as bonds across the world rallied:

2 day chart of 10 year Treasury Yield, Courtesy of Bloomberg

3) The Dollar sold off against all major currencies, with the Euro displaying the largest overnight range:

2 day chart of EUR/USD, Courtesy of Bloomberg

4) Precious metals and copper rallied (the most oversold commodities, while oil curiously reversed). Front month gold contract:

Front month gold futures 2 day chart, Courtesy of Bloomberg

So big moves galore.

As for me, I was wrong. Badly wrong. Over the past couple months, I expected a fuller correction process to play out based on a variety of factors. Whatever my reasons though, the market has proved me wrong. Even if it turns lower from here right away, my timing was wrong, so the trade was wrong. It’s that simple.

What makes trading so different from other professions is that you’re wrong so often. Accepting the inevitably of being mistaken is the first mandate of risk management. The real key is keeping your losses smaller than your profits. Many of the best traders I have known have only been right 30% of the time, but were consistently profitable nonetheless.

I’ve done a decent job of learning solid risk management throughout my career. In other words, I’ve been wrong-footed by the market many times before. Minimizing losses, though, has been the way to handle those periods.

That’s where I’ve done poorly in the past 2 weeks. My losses are larger than they should be for a losing period, and I have no one to blame for that but myself. Not evil conspirators, not central bankers, and not Mr. Market. Effective risk management is so useful precisely because it allows a trader to be successful no matter the market environment, no matter the news. I might have a view on what I think could happen, but managing the position well is much, much more important than whether that view turns out to be correct or not.

So I’ll take my losses, and take it as a costly lesson in risk management once again. Rather than good luck, I wish you good risk management.