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Trading Risk: Enhanced Profitability through Risk Control


A revolutionary system for fearless trading without excessive risk

"Trading Risk provides a useful and intuitive roadmap of the risk management process, as written by an individual with unique experience and insight into this topic. It is an engaging read and covers complex subject matter in a straightforward and often-entertaining manner."
– Stanley Shopkorn, Shopkorn Associates

"Ken Grant's eminently readable new book on risk management is a rare blend of theory and practical applications. It is a great starting point for the novice and deep enough for the experienced practitioner."
– Mark R. Graham, Managing Partner, Blue Elite Fund, Ltd.

"This book describes a very practical approach to risk management in a lucid and entertaining manner. Anyone concerned with the topic of risk management ought to find it of interest."
– Susan Estes, Managing Director, Countrywide Securities

"Thoughtful, unique, detailed, actually enjoyable, and comprehensible reading for what is normally a boring and confusing topic."
– Dwight Anderson, President, Osprei Management, LP

"A must-read for risk managers of companies of all sizes who want to preserve capital and take practical advantage of trends in the marketplace. This is a clearly written, funny, and entertaining guide to a very serious topic that affects all corporations. This very complex topic was simplified and made easy to understand by a true expert in the art of risk management."
– Phupinder Gill, Managing Director & President
Chicago Mercantile Exchange

Kenneth L.Grant is Cheyne's Global Risk Manager, and is the Managing Member for Cheyne Capital, LLC, the firm's U.S. arm. Mr. Grant is a pioneer in the field of hedge fund risk management and capital allocation. Before joining Cheyne, he created risk control programs at two of the world's leading hedge funds, Tudor Investments and SAC Capital, where he was eventually promoted to the title of Chief Investment Strategist. Earlier in his career, Mr. Grant led risk management efforts for the Chicago Mercantile Exchange and Société Générale. He is also a member of the Board of Directors of the Managed Futures Association (MFA), and is a founding member of MFA's Hedge Fund Advisory Committee–the industry's leading trade relations organization. He is a principal author of MFA's Sound Practices for Hedge Fund Managers (2000). Mr. Grant holds a Bachelor of Science in Economics and Mathematics from the University of Wisconsin, an MA in Economics from Columbia University, and an MBA from the University of Chicago Graduate School of Business.


CHAPTER 1: The Risk Management Investment.

CHAPTER 2: Setting Performance Objectives.

Optimal Target Return.

Nominal Target Return.

Stop-Out Level.

The Beach.

CHAPTER 3: Understanding the Profit/Loss Patterns over Time.

And Now to Statistics, but First a Word (or More) about Time Series Construction.

Time Units.

Time Spans.

Graphical Representation of Daily P/L.

Histogram of P/L Observations.


A Tribute to Sir Isaac Newton.

Average P/L.

Standard Deviation.

Sharpe Ratio.

Median P/L.

Percentage of Winning Days.

Performance Ratio, Average P/L, Winning Days versus Losing Days.



Putting It All Together.

CHAPTER 4: The Risk Components of an Individual Portfolio.

Historical Volatility.

Options Implied Volatility.


Value at Risk (VaR).

Justification for VaR Calculations.

Types of VaR Calculations.

Testing VaR Accuracy.

Setting VaR Parameters.

Use of VaR Calculation in Portfolio Management.

Scenario Analysis.

Technical Analysis.

CHAPTER 5: Setting Appropriate Exposure Levels (Rule 1).

Determining the Appropriate Ranges of Exposure.

Method 1: Inverted Sharpe Ratio.

Method 2: Managing Volatility as a Percentage of Trading Capital.

Drawdowns and Netting Risk.

Asymmetric Payoff Function.

CHAPTER 6: Adjusting Portfolio Exposure (Rule 2).

Size of Individual Positions.

Directional Bias.

Position Level Volatility.

Time Horizon.




Nonlinear Pricing Dynamics.

Relationship between Strike Price and Underlying Price (Moneyness).

Implied Volatility.

Asymmetric Payoff Functions.

Leverage Characteristics.


CHAPTER 7: The Risk Components of an Individual Trade.

Your Transaction Performance.

Key Components of a Transactions-Level Database.

Defining a Transaction.

Position Snapshot Statistics.

Core Transactions-Level Statistics.

Trade Level P/L.

Holding Period.

Average P/L.

P/L per Dollar Invested (Weighted Average P/L).

Average Holding Period.

P/L by Security (P/L Attribution).

Long Side P/L versus Short Side P/L.

Correlation Analysis.

Number of Daily Transactions.

Capital Invested.

Net Market Value (Raw).

Net Market Value (Absolute Value).

Number of Positions.

Holding Periods.


Other Correlations.

Final Word on Correlation.

Performance Success Metrics.

Methods for Improving Performance Ratios.

Performance Ratio Components.

Maximizing Your P/L.

Profitability Concentration (90/10) Ratio.

Putting It All Together.

CHAPTER 8: Bringin’ It on Home.

Make a Plan and Stick to It.

If the Plan’s Not Working, Change the Plan.

Seek to Trade with an “Edge”.

Structural Inefficiencies.

Methodological Inefficiencies.

Play Your P/L.

Avoid Surprises—Especially to Yourself.

Seek to Maximize Your Performance at the Margin.

Seek Nonmonetary Benefits.

Apply Liberal Doses of Humility and Humor.

Be Healthy/Cultivate Other Interests.

APPENDIX: Optimal f and Risk of Ruin.

Optimal f.

Risk of Ruin.