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The Psychology of Risk and Return

Posted on June 24, 2008

Here is an absolutely phenomenal resource from Henry Carstens that takes your average win size per trade and the standard deviation of your daily returns and generates, Monte Carlo style, plots of your forecasted P/L curves. If you play with the two parameters, you'll see how changes in your risk (variability of your returns) and reward (size of your average profits) affect your overall results over time.Imagine a $100,000 portfolio that averages, over the course of two years (100 weeks) a return of 50 basis points (1/2% or $500) profit per week with 100 basis points (1%) average variability ...

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markets , trading , volatility