Summary

In this chapter, we did not have a polite conversation about risk. We explored risk metrics that will unapologetically assess your ability to live to trade another day. We considered the Grit Index, which integrates drawdowns (magnitude, frequency, and duration). Then, we introduced the common sense ratio, which recaptures risk specific to both trend-following and mean reversion strategies. Finally, we looked at the system quality number ratio, before combining all three into a combined robustness score, which helps assess risk by combining trading frequency and trading edge.

In Part II, The Outer Game: Developing a Robust Trading Edge, we looked at how to generate ideas on the short side. We then looked at what the trading edge exactly is and how to boost it. We came up with an innovative equity trading algorithm. Finally, we looked at risk metrics that really measure robustness.

Now that we have plenty of ideas on both sides, and know how to size and prioritize them...