TRADING AND RISK: 22 May 2012 - afrra.org fileTRADING AND RISK: 22 May 2012 Chris Heilpern...

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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

1840’s: The End of the Whale

Giant Vampire Squid Attacks a Sperm Whale

Crude oil prices

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 $/bbl$/

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

AGE OF WAR and INTERNATIONAL MARKETS

THE MODERN ERA

WHAT DRIVES PRICES TODAY?

1970-1999

• Classic Model of Commodity Trading

• Supply and Demand

• Headlines and Shocks

ALGORITHMS, BLACK BOXES, AND THE FED45% of trades on NYMEX are HFT and algorithms

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?

RISK IN THE NEW WORLD OF TRADINGTraditional Tools no longer applyVAR and the Gaussian Distribution

FAT TAILS AND SKYNET

NYMEX Natgas 8 June 2011

Infinium Algorithm on WTI 3rd Feb 2010

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!)

WHAT IS YOUR MAJOR RISK AS A TRADER?

YOU!YOU!You are the biggest risk to your tradingYou are the biggest risk to your trading

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

• 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

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

The ZURICH AXIOMS

• On Risk:

• On Greed:

• On Hope:

• On Forecasts:

• On Optimism:O Op s :

THE ZEN OF TRADING by Barry Ritholz

HAVE A PLAN

• EXPECT TO BE RONG

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

THE FIVE QUALITIES OF ALL GREAT TRADERS

1) Loss cutting

2) Confidence)

3) No ego3) No ego

4) Consistency

5) Students of the market

Questions? Comments? Insults?

THANK YOU!

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.

TRADING AND RISK: 22 May 2012 - afrra.org fileTRADING AND RISK: 22 May 2012 Chris Heilpern...

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