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TRADING AND RISK: 22 May 2012TRADING AND RISK: 22 May 2012
Chris Heilpern Instructor at EDHEC and SKEMA Business SchoolsConsultant and Professional Trainer
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 1
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012
Contents:
A Brief History of Oil Marketsy
Who and What Drives Oil Markets Today?
Risk in the Brave New World
What is Risk?
Biases and Foibles
Managing Risk: Rules and Advice for Any Age
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 2
1840’s: The End of the Whale
Giant Vampire Squid Attacks a Sperm Whale
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Crude oil prices
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VOLATILITY IN THE NEW COMMERCIAL ERA
US Oil Prices
Jan 1861 10.00 $/bbl
86 0 0 $/bblDec 1861 0.10 $/bbl
Sep 1863 7 25 $/bblSep 1863 7.25 $/bbl
1867 2.40 $/bbl$/
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 5
20TH CENTURY : MONOPOLIES AND PRICE CONTROLS
• Standard Oil: Rockefeller• Standard Oil: Rockefeller
1879: 90% of US refining1879: 90% of US refining
1890: 80% of all oil sold or produced1890: 80% of all oil sold or produced
• Shell: Rest of the worldShell: Rest of the world
• 1911: Trust Busting1911: Trust Busting
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 6
AGE OF WAR and INTERNATIONAL MARKETS
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THE MODERN ERA
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WHAT DRIVES PRICES TODAY?
1970-1999
• Classic Model of Commodity Trading
• Supply and Demand
• Headlines and Shocks
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ALGORITHMS, BLACK BOXES, AND THE FED45% of trades on NYMEX are HFT and algorithms
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DO PHYSICAL TRADERS MATTER ANY MORE?
• Information: easily accessible
• Size and scope of derivatives markets
• Commodities as an asset class
• Who will lead the energy markets?Who will lead the energy markets?
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 11
RISK IN THE NEW WORLD OF TRADINGTraditional Tools no longer applyVAR and the Gaussian Distribution
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FAT TAILS AND SKYNET
NYMEX Natgas 8 June 2011
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Infinium Algorithm on WTI 3rd Feb 2010
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WHAT DOES TRADING RISK BOIL DOWN TO?
How much can you lose?
Heinz Schimmelbusch
Nick Leeson Nick Leeson
Chen Jiulin
Brian Hunter
Jerome Kerviel
Howie Hubler Howie Hubler
Bruno Iksil (back to whales!)
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WHAT IS YOUR MAJOR RISK AS A TRADER?
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YOU!YOU!You are the biggest risk to your tradingYou are the biggest risk to your trading
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 17
TRADING AND PSYCHOLOGY: BIASESTRADING AND PSYCHOLOGY: BIASES
Definition:
An inclination or preference that influences judgment from being balanced or even-judgment from being balanced or evenhanded
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• ADDICTION BIAS
• ATTENTIONAL BIAS
• GROUPTHINK OR HERD BEHAVIOR
• CONFIRMATION BIAS
• ENDOWMENT EFFECT
• GAMBLERS FALLACY
• HINDSIGHT BIAS
• VALIDITY ILLUSION
• LOSS AVERSION
• OUTCOME BIAS
• RECENCY BIAS
• MEMORY BIASES
• ATTRIBUTION or SELF-SERVING BIAS
• TECHNICAL BIAS
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HOW TO DEAL WITH RISK AND BIAS
• Max Gunther’s Zurich AxiomsPlayboy son of wealthy bankerNot a trader
• The Zen of Trading by Barry Ritholz Investment manager, market strategist Investment manager, market strategistBlogger, media pundit
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The ZURICH AXIOMS
• On Risk:
• On Greed:
• On Hope:
• On Forecasts:
• On Optimism:O Op s :
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THE ZEN OF TRADING by Barry Ritholz
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HAVE A PLAN
• EXPECT TO BE RONG
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HAVE A PLAN• SET YOUR STOPS
• FOLLOW DISCIPLINE• FOLLOW DISCIPLINE
• KEEP EMOTIONS IN CHECK
• TAKE RESPONSIBILITY
• CONSTANTLY IMPROVE
• CHANGE IS CONSTANT• CHANGE IS CONSTANT
• LEARN TO GO LONG AND SHORT
• UNDERSTAND MARKET vs SECTOR STRENGTHS
ARA Trading & Finance Seminar Genève 22nd/23rd May 2012 24
THE FIVE QUALITIES OF ALL GREAT TRADERS
1) Loss cutting
2) Confidence)
3) No ego3) No ego
4) Consistency
5) Students of the market
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Questions? Comments? Insults?
THANK YOU!
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CITAC Africa LtdBelgrave House76 Buckingham Palace RoadLondon, SW1W 9TQLondon, SW1W 9TQUKTel: +44 (0)207 343 0014E mail: info@citac comE-mail: info@citac.comWeb: www.citac.com
CITAC® is a registered trademark. Any reproduction of information contained within this presentation requires CITAC’s permission.
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