Risk Management
Article on the basics of Risk Management.
Important note
Risk management is one of the most profound subjects in the world of finance. There are numerous books, articles and guides written on the best approach, but in the end there is no one more capable than managing risk than yourself, as only you have this personal bond with your portfolio. Please understand that these are only guidelines and do not guarantee success.
PinoAPI and You
In this article, we will mainly focus on ways you can combine PinoAPI with your personal risk management strategies. This way, you can use some of its guidelines and add your own personal touch to fit your approach, capital, and risk tolerance.
Winning is losing
When you think of risk management, you often overlook one of the most important aspects: losing money, giving back what you earned to the market, or failing. Before you can even begin managing your risk, you must understand, and more importantly, accept the fact that you will lose from time to time. Nobody is perfect; not even the most advanced algorithms are capable of generating win after win without any setbacks. Accepting that losing, in some way, is also winning is part of the process and should not be seen as an obstacle to your success in any way.
Losing a significant amount of money brings you back to reality.
Isolate risk
At PinoAPI, we allow our users to isolate their risk by using multiple APIs. Here is an example of how you could manage your risk by isolating your portfolios.
API 1: $10.000
API 2: $30.000
In this example, you have $40.000 to invest. You put $10.000 into a riskier (Aggressive) investment (API 1) that has higher potential returns but also carries more risk. You put the remaining $30,000 into a safer (Defensive) investment (API 2) that has lower returns but also lower risk.
Each month, API 1 generates a return of 25% or $2.500*, while API 2 generates a return of 2% or $600*. You take the profits from API 1 and transfer them to API 2 to benefit from the lower-risk compounding interest. Assuming the returns are reinvested monthly, the balance on API 1 is: $12.500 ($10.000 initial investment + $2.500* return). API 2: $30.600 ($30.000 initial investment + $600 return*). At the end of each month we transfer the $2.500 of API 1 to API 2. After the 2nd month API 1 is: $12.500 ($10.000 initial investment + $2.500* return). API 2: $33.762 ($33.100 start + $662* return). Again we transfer the profits from API 1 to API 2 putting a total of $10.000 on API 1 and $36.262 on API 2. By doing this, after 12 months, your initial $40.000 investment theoretically grows to $12.500 in API 1 and $69.077 in API 2. Forming a net total of: $81.577*
By transferring profits from API 1 to API 2, you are effectively increasing the initial investment in API 2 each month. As a result, API 2's monthly return also grows due to compound interest, which is factored into the formula. This allows you to maximize your returns while minimizing your risk by balancing the investment across multiple APIs.
If you were to lose 25% of API 1 after 3 months of profitable trading, the value of your investment in API 1 would decrease from $10.000 to $7.500. In order to get back to the initial growing curve, API 1 would need to generate a return of 33.33% on the remaining $7.500 to get back to the original $10.000 value.
Assuming API 1 continues to generate a monthly return of 25%, it would take approximately 2 months to recover from the 25% loss. After one month of generating a 25% return, the value of your investment in API 1 would increase to $9.375 ($7.500 * 1.25), and after another month of generating a 25% return, the value of your investment in API 1 would increase to $11.719 ($9.375 * 1.25), which is slightly above the original investment of $10.000.
The strategy of isolating risk and balancing investments across multiple APIs, as described in the article, can help investors maximize their returns while minimizing their risk. While a loss of 25% in one API may temporarily slow down the growth of the investment portfolio, it does not significantly hinder the overall growth process.
This is because the investment portfolio is diversified across multiple APIs, with a larger portion invested in a lower-risk, but also lower-return API. As a result, the impact of any losses in the higher-risk API is mitigated by the returns from the lower-risk API, which continue to compound over time.
Furthermore, the strategy of transferring profits from the higher-risk API to the lower-risk API can help accelerate the growth of the overall investment portfolio. By increasing the initial investment in the lower-risk API each month, the returns from that API also grow due to compounding interest. This can help offset any temporary setbacks caused by losses in the higher-risk API.
Overall, while there may be temporary setbacks or fluctuations in the growth of the investment portfolio, the strategy of balancing investments across multiple APIs and transferring profits between them can help investors achieve long-term growth and minimize risk.
API 1: Volatile
API 2: Stable
Users with the Advanced tier get access to 8 API's.
Conclusion
In conclusion, risk management is a crucial aspect of the world of finance, and investors must learn to accept and manage losses as a part of the process. Using PinoAPI to combine with personal risk management strategies can be a useful approach for investors looking to balance risk and reward. However, it is important to remember that every investment carries risks, and good analysis and caution are necessary to avoid losing one's account early. Ultimately, investors must carefully consider their individual circumstances and preferences when developing a risk management strategy that works best for them.
*Before fees
Risk no more than you can afford to lose, and also risk enough so that a win is meaningful ~ Ed Seykota
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