Confessions Of A Market Maker Episode #65: John Netto- Maximizing Return Per Unit-of-Risk
12 snips
May 12, 2021 AI Snips
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Transcript
Episode notes
Early Bookmaking Lessons
- John ran an illegal high-school bookmaking operation and learned the economics of taking the other side of bets.
- He discovered credit risk and debtor defaults destroyed his edge when winners wouldn't pay.
Profit Factor Beats Win Rate
- Traders overvalue win rate and underrate the asymmetric damage of rare events.
- Net wealth growth depends on profit factor (returns per unit risk), not percent wins.
Set A Risk Budget First
- Define a clear risk budget before trading and size positions to that budget.
- Manage each portfolio strategy with its own stop so behavior aligns with known risk limits.