Taking a Non-traditional Approach to Risk Management
Understand that I do NOT take a standard approach to investing. Many, if not most, of the concepts I write about run contrary to popular beliefs about risk and traditional investing practices. I will not cover or analysis, nor will I waste time speculating about how the daily news might affect the market. To me, the impact of these factors are highly subjective, and for most of us, require an unrealistic amount of time and resources. All risk management techniques and investment decisions discussed at Food for Theta are based entirely on objective probabilities generated by the math models used to establish the prices. If you'd like to study charts and fundamentals independently to boost your confidence and then more power to you! It will not, however, be required to learn my style of investing or make informed decisions.
Developing a Probabilistic Mentality
As previously stated, all strategies and concepts on Food for Theta are examined through the lens of probability. This means that for every decision, we use a risk to reward ratio to estimate our odds of success. I believe in using strategies that offer high odds of success in exchange for taking greater risks relative to the potential reward (more detail on how probabilities work down the road). To keep those risks in check, I keep trade sizes small and use a relatively low percentage of my total capital. While often use up to 95% of their total my approach typically utilizes only 30-50%. When done properly, this balance can create a portfolio with a high statistical likelihood of profitability, plenty of back-up cash, and a lower risk of catastrophic loss.
Pursuing Product Indifference
For the most part, this approach to investing eliminates concern for the name of the product. Whether you're trading Apple or Microsoft, gold or oil, Brazilian or Chinese equities, most products can be viewed as essentially the same thing: random variables with fluctuating levels of and value. In simpler terms, we can look at most products as if they were boardgames with different titles, but the same rules. They may be played at different speeds, accommodate a fluctuating number of players, and vary in cost, but they are essentially the same game. Keep in mind that there are some abnormal products out there, but those will be discussed in a future article.
Embracing The Beauty of Two-sided Markets
Every trader is different and none of the concepts I discuss here are absolute rules. My only goal is to help you develop the knowledge you need to find your own way and make your own decisions. Once you establish your bearings, you will almost certainly deviate from my methods to build a strategy that accommodates your personal goals, skill level, and tolerance for risk. This is the beauty of trading in a two-sided market. You have the power and freedom to do whatever you want as long as you have the buying power and understand the risk. If ever there is something that just doesn't work for you, you are free to embrace the opposite strategy or find one that functions in a completely different manner.
Onward and Upward!
If this sounds like a worthwhile challenge then let's get you set up with the tools you'll need to access the market and follow my tutorials. Beyond that we will discuss products, finding and placing trades, strategy mechanics, portfolio management and more!