Trading Risk: Enhanced Profitability through Risk Control (Wiley Trading) [Kindle Edition]

In his book Trading Risk, Ken Grant draws upon his experience as a risk manager for Tudor Investments and SAC Capital to create an insightful and surprisingly non-technical guide for traders and portfolio managers. As Director of Trader Development at a large proprietary trading house, I have been impressed with the role risk management plays in the success of the firm and its individual traders. Moreover, this is a scalable difference: risk management very much impacts the outcomes of individual trades, results of trading days, and performance across entire quarters. Where I believe Grant has admirably succeeded is in documenting that risk management is much more than simply "cutting your losses". Trading Risk systematically breaks down elements of the process of managing trades, from the establishment of concrete objectives to the allocation of risk capital to specific trades and the use of correlation analysis in evaluating trading results. His discussions of adjusting portfolio exposure and evaluating the risk components of individual trades are highly practical and encourage a rigor of self-analysis that is rarely practiced.

Perhaps an example from my own work with traders that overlaps Grant's ideas might be illustrative. I encourage traders to keep a log of all their trades that tracks time of day, position taken, position size, holding period, and profit/loss (P/L). Changes to the position are also documented, as traders scale into or out of trades. From this record, we can evaluate a host of performance statistics, such as position sizing as a function of market volume/volatility, the correlation of profitability with trade size/holding period, and patterns of activity within the trading day. While Grant's background is with portfolio management-appropriate to a manager who is holding a basket of positions in a variety of equities-his ideas are easily adaptable to the intraday trader who is trading a single instrument. By viewing each trade during a day as an element of that day's "portfolio", we can ask important questions about the mix of position sizes, overall directional bias, and the management of volatility as a function of trade capital/loss limits.

Written in an engaging style with bits of humor interspersed, Trading Risk ends with a practical chapter that summarizes the book's major points. He explains the importance of developing and modifying trading plans, defining one's trading "edge", judiciously allocating risk capital, and improving performance "at the margin". This latter point is a particularly neglected element in risk management. For the active, large trader, the ability to squeeze the extra tick out of trades is frequently the difference between a winning day and a losing one. Superior traders have an ability to read the very short-term patterns of price change and momentum to determine when it is prudent to hit the bid or let the market go offer in exiting a position. At such points, good risk management and good trading are indistinguishable.

I have few reservations about Grant's book. A text of 250 pages is not going to provide many workbook-like examples, something that would help the more mathematically challenged master the ideas of value-at-risk and correlation analysis. Small retail traders who trade only occasionally will probably find the risk metrics less compelling than larger, active traders or portfolio managers, though the basic principles emphasized in the last chapter certainly apply to any serious trader. Considering the absence of serious discussions of risk management in the popular trading literature, Trading Risk is a major contribution and a worthy addition to a library. I plan to use it as a core reading in our training program for new traders, perhaps the best endorsement I can give.

Ken Grant is a world-class risk manager and an entertaining, thought-provoking writer who has successfully intertwined his knowledge of performance-enhancing risk management techniques, human history, rock-and-roll wisdom and an engaging account of his own experiences and anecdotes as head of risk management/ Chief Investment Officer at some of the largest and most consistently profitable hedge funds in the nation.

This book is fascinating, insightful and fairly easy to read, but is also a highly detailed and practical tool for anyone seeking a blueprint for implementing Ken's own dynamic and adaptive risk management processes. Ken offers up valuable insights and methodologies along with case studies gleaned from his long and highly successful career at the epicenter of the hedge fund universe. Ken's wisdom and graceful writing style make it a pleasure to read this book on what can be a difficult and confusing subject. Trading Risk can help develop a discipline that fits your personal trading style and risk tolerance in a manner designed to elicit some control and order to the seemingly chaotic maelstrom of long/short equity trading. Reading and implementing some of the techniques in this book can help make you a better and more consistently profitable trader with lower volatility and less downside risk.

While there are quite a few books on this subject ranging from purely statistical/mathematical treatises to the "for Dummies" types, I found Grant's Trading Risk to be the most accessible for non quant types (like me) who want to be able to combine real-time risk monitoring with historical statistical trend analysis. This book teaches you how to do that, and does so in a way that is both easily understandable and immediately implementable - each chapter reveals increasingly sophisticated techniques that build on each other in succession, yet each may be utilized right away, so you don't need to finish the whole book before you can begin to benefit from it. It describes in plain English how to take your past performance and break it down, slice and dice it position by position overlaid against the broader market trends, gain insight from the "hows and whys" of your winners and losers and how to adapt your trading strategy accordingly.

In short, this is real-world stuff from a guy who has spent his entire career in the trenches with some of the smartest, toughest, most successful traders on the planet. In the hedge fund world a lot of investors made a great deal of money with just a couple of great years, and then either retired, blew-up or stagnated. Ken has thrived - since the birth of the modern hedge fund industry - by continually refining his approach. He is the real deal, and so is this book.

Grant's skillful review of the sometimes complex topics in this field are a revelation. This text should be used by all students in the field, and expereinced practitioners will benefit as well.