More on knowns, unknowns and risk

The recent passing of Donald Rumsfeld caused me to reflect again on his (in)famous "known knowns, known unknowns and unknown unknowns" speech (see here), but the truth is that we always have such instances possible in the markets, at any time.

Using volatility contraction to increase your profits

Often you see people talking about a winning trade, and how far in percentage terms price moved in their favour after entry.

But on its own, this doesn't tell you anything - to me, it is a worthless metric when evaluating performance.

As a trader, I'm far more interested in the size of the profit (or loss) generated when expressed in terms of R.

Risk and the 1987 stock market crash

This coming week marks the 30th anniversary of the 1987 stock market crash. On 'Black Monday', the world's equity markets were in chaos.

Following this, circuit breakers were introduced in an attempt to prevent such dramatic one-day moves. These were further strengthened following the May 2010 'Flash Crash'.

Is this another 'once in a lifetime' event?

As I type this, we still don't know the outcome of the ongoing negotiations between Greece and the EU/ECB/IMF 'troika', and the potential ramifications of any decision taken - from the political, economic or the financial markets point of view.

No doubt there will be traders seeking to profit from this situation, but we have already seen this year how an unexpected announcement created a major market event.

Back in January, we went through a supposed 'once in a lifetime' event with the extreme price moves on the EUR/CHF, and other related currency pairs. Now, less than six months later, we may be on the verge of another.