Trend Following 7: Risk Management and the "Grab a Bargain" Trading System

This episode explores risk management in trading, using a coin-toss game to illustrate concepts like optimal betting strategies (fixed-fraction vs. fixed-bet), simulation for system optimization, and the importance of sticking to a defined system rather than relying on hunches. Mark Sleeman's research, conducted with Seykota, tests a "buy low, sell high" trading system ("GRAB") against historical futures market data. Contrary to expectations, the GRAB system proved unprofitable, highlighting the challenges of consistently timing market bottoms and tops, and emphasizing the often-uncomfortable, yet profitable, nature of trend-following strategies. Both sources underscore the significance of rigorous testing and disciplined adherence to well-defined trading systems for success.