Archimedean Trade Selection

Archimedean Trade Selection
Visualize the market risk-reward as a partially filled bucket, where some portion of the total volume is risk (water) and some is reward (air). Now imagine each possible strategic implementation of the trader’s view as an opaque balloon, varying in size relative to the total amount of exposure inherent in the trade. Each strategic balloon will be filled with some volume of risk (water) and some quantity of reward (air). If the trader were to place the balloons into the bucket, each would sink to the degree to which they were filled with water. The heavier, mostly-water balloons would sink low in the bucket and the mostly-air balloons would sit with most of their volume above the surface. The relative proportion of risk and reward inherent in each transaction would be easily observed and the best strategy would, literally, float to the top.

JPEG Figure 12.1 Archimedian Trade Selection.jpg

Figure 12.1     Archimedean trade selection.  

Unfortunately, assessing the relative merits of an array of strategic alternatives is not nearly as scientifically straightforward.

The evaluation process begins with the trader’s view of the market and a set of potential implementation strategies. From there, the trader must determine:

1.    What can be done, given available resources
2.    What could be done, given the current P&L relative to goals
3.    What should be done, by evaluating strategies
4.    What will be done, by selecting the best implementation
5.    How it will be done, by developing a trading plan.


From Chapter 12 - Evaluating Trades & Creating a Trading Plan, Pages 477-478.

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Excerpt from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.