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High Probability Trades Defer Risk, Not Manage It

If we fail to plan…you know how the saying goes. I experienced my largest loss several years into my trading career. I had be doing decent and had over 4 years in the market.

The trade was a very wide short iron condor in RUT that was a very high probability trade. There it was, that was the plan.

As we can all see the series of glaring issues here, a couple stand out specifically:

-I relied on probabilities to manage my risk. This was pure ignorance.

-I didn’t size properly. I was too focused on what I was trying to make vs how the trade would behave during its lifecycle.

I made this mistake once and it was the largest % drawdown (I’ve lost far more on a raw $ basis) on my account over the past 15 trading years. Sure the trade “set me back” but that’s all relative anyways so that part didn’t bother me. The issue was I failed to understand these high POP trades simply defer the risk into the future where at some point, if we continue the same strategy long enough, will eventually be realized.

I now deploy (2) risk control measures.

1. Each trade has clearly defined risk protocols via sizing and mental stops.

2. The portfolio has max drawdown thresholds, diversification requirements, utilization scales, etc.

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