Comments on: Seeking Alpha http://www.tasgall.com/2006/08/27/seeking-alpha/ Peering into the Cauldron of the Gods... Fri, 27 Aug 2010 09:05:17 +0000 hourly 1 http://wordpress.org/?v=3.0.1 By: Quicksilver http://www.tasgall.com/2006/08/27/seeking-alpha/comment-page-1/#comment-169 Quicksilver Mon, 28 Aug 2006 18:12:15 +0000 http://www.tasgall.com/2006/08/27/seeking-alpha/#comment-169 Not at all. But I think it pretty much says the same thing. If a trade seems to require less of a stop loss than another for the same profit potential, then it has greater alpha because the lesser stop loss = lesser expected volatility. But I think it's important to think about alpha independently from trading tactics such as money management and stop losses too. An investment needs to have a level of "inherent" alpha to it before a trading plan is even built around it. It needs to speak to the investor and say, "I'm going to fight you less and give you more." You'd be surprised how many people accept higher volatility in investments that return less proportionally to that volatility. Thus the rise of index investing. People figured out that this hot shot mutual fund couldn't beat the S&P and actually had bigger drawdowns in the process. Greater risk should provide more reward but so many paths in the market take you to the flip side. So yes risk/reward is a great way to sum it up. There is nothing wrong with more risk as long as you are rewarded reasonably for it compared to other alternatives and it fits into your overall tolerance. Seems like common sense, sure, but it's good to keep in the forefront. Not at all. But I think it pretty much says the same thing. If a trade seems to require less of a stop loss than another for the same profit potential, then it has greater alpha because the lesser stop loss = lesser expected volatility.

But I think it’s important to think about alpha independently from trading tactics such as money management and stop losses too. An investment needs to have a level of “inherent” alpha to it before a trading plan is even built around it. It needs to speak to the investor and say, “I’m going to fight you less and give you more.” You’d be surprised how many people accept higher volatility in investments that return less proportionally to that volatility. Thus the rise of index investing. People figured out that this hot shot mutual fund couldn’t beat the S&P and actually had bigger drawdowns in the process. Greater risk should provide more reward but so many paths in the market take you to the flip side.

So yes risk/reward is a great way to sum it up. There is nothing wrong with more risk as long as you are rewarded reasonably for it compared to other alternatives and it fits into your overall tolerance. Seems like common sense, sure, but it’s good to keep in the forefront.

]]> By: John http://www.tasgall.com/2006/08/27/seeking-alpha/comment-page-1/#comment-168 John Mon, 28 Aug 2006 13:43:37 +0000 http://www.tasgall.com/2006/08/27/seeking-alpha/#comment-168 One way to approach "finding alpha" is to come up with realistic risk/reward ratios. Consider your investment purchase, set a stop-loss and then examine the amount of profit that you can realistically expect to make from this transaction. Is it 3 times your stop loss, 5 times, or greater? This is probably the easiest method to translate "finding alpha" into simple trading terms requiring practically no formula calculations. Ask yourself: I'm risking $2/share on this transaction, and I stand to make $10/share if my analysis is correct. This is a better trade than one that requires a great stop-loss or has less up-side potential. Is my explanation above overly simplistic? One way to approach “finding alpha” is to come up with realistic risk/reward ratios. Consider your investment purchase, set a stop-loss and then examine the amount of profit that you can realistically expect to make from this transaction. Is it 3 times your stop loss, 5 times, or greater? This is probably the easiest method to translate “finding alpha” into simple trading terms requiring practically no formula calculations.

Ask yourself: I’m risking $2/share on this transaction, and I stand to make $10/share if my analysis is correct. This is a better trade than one that requires a great stop-loss or has less up-side potential.

Is my explanation above overly simplistic?

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