Who is your Risk Manager?

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Make a quantum leap in your trade preparation by including a Risk Manager in your trading process; just like they do on Wall Street.


“Its amazing how quickly gold can turn into shit’

Story as told by Chris Arnade in “The Guardian” October 1, 2013

“My first big trade on Wall Street was approved by a fat man smoking cigarettes in a stairway littered with the butts from past conversations. That man, John, was the head of trading at Salomon Brothers, on the executive board, and only one step below the CEO. It was 1994 and he had been with the firm twenty years as a trader. I had been there just one.

I was meeting with him because my boss, and my boss’s boss, did not feel comfortable approving my trade, an investment of $200m in Brazil’s currency, the real. I believed the currency had a brighter future than many others thought, and John and I met up to talk about it. The smoking ban, only enacted six months before, had pushed us into the fire escape outside his corner office.

I made my pitch. He smoked, belched and listened, before asking me a volley of questions. Most focused on how, when and if I could get out of the trade. Some were amazingly naïve about culture as well as finance: “Can you read Spanish?”

He approved half the trade I wanted: $100m. He tossed his butt on the ground and left, saying, “It’s amazing how quickly gold can turn into shit.” Two weeks later, my trade was, in fact, starting to act more like shit than gold. To the untrained eye it still looked good, and it was making money, but many of the arguments that had justified the trade were turning out poorly. As I would put it on the trading floor, “the forwards are acting squishy.” That meant that the market’s confidence in the Brazilian real was starting to dwindle.

After a particularly bad day, I was riding the elevator down to the cafeteria when John got on. For most of the ride he chatted with friends about weekend skiing plans. Near the end he turned to me and asked about the trade: “You thinking of getting out?” I pointed out that the trade was still making money. He pointed out what had changed. It was clear he now knew more about Brazilian currency than I did.

Later, when I told my boss that I was surprised someone so senior knew so much about my trade, he laughed:

“That’s his money you are trading. The old managing directors, they still act like partners who own the firm.”

After a restless night I unwound the trade the following morning at a small profit. That saved us a loss about $10m. Two weeks later, Brazil blew up. A currency crisis had started.”


Key Observations

  • Big time traders at big time Wall Street firms need to get their trade ideas “approved”.   Who approves yours?
  • Great trades can and often do “turn to shit” very quickly.  When they do, GTFO ASAP. Don’t wait. Don’t hope. Don’t Pray. Just GTFO.
  • Capital preservation is the most important thing in trading

Action Activities

  • Imagine how your trade preparation would change if every trade you contemplated had to be approved by a Risk Manager.
  • How many half-cocked, impulsive trade ideas would your Risk Manager throw in the trash with a cursory glance?
  • Find a Trading buddy. Be each other’s Risk Manager
    • Empower each other with complete veto power over each other’s trades.
  • Prepare each trade plan with meticulous attention to detail
    • Entry, Exit, stop, Risk size. Leave no stone unturned
    • Imagine right now how different your trade plans will look.
    • Imagine how much better they will be.
  • Don’t wait; Start now.

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