Risk1 Reward3 - Systematic Trading

Nearly four thousand years ago, Joseph was appointed overseer of Pharaoh's granaries. During seven years of abundance, when every instinct said consume, expand, deploy, he stored. Grain counted. Inventory catalogued. Reserves measured and held.

When famine arrived, Egypt survived. Not because it had more resources than its neighbours. Because it had reserves when its neighbours had none.

The principle has not changed. The inventory has. Grain became capital. Granaries became accounts. But the discipline is identical.

The most counterintuitive move in capital management is also the most mathematically sound.

Keep 20% to 40% of total capital undeployed.

Not because deployment opportunities are missing. Because the reserve itself is doing work.

Two things happen when capital sits deliberately idle.

First, the effective volatility of your total capital base drops. If 60% of capital is deployed at 30% volatility, total capital volatility is only 18 %. The volatility tax on the entire equity curve drops by more than half.
Same arithmetic return.
Lower tax.
Higher geometric growth.

Second, the reserve provides deployment capacity after drawdowns. Fresh inventory when prices are lower, when others are forced to sell, when the opportunity set has expanded. Deployment from strength. Not desperation.
The instinct says idle capital is wasted capital. The mathematics says idle capital is the cheapest insurance you will ever own.
It lowers your volatility tax.
It provides optionality.
It turns drawdowns from threats into opportunities.

Joseph understood this before volatility had a formula.
Store during abundance.
Deploy during scarcity.
Survive what others cannot.

Capital you choose not to deploy is not inactive. It is the most active capital management decision you can make.

Think in odds. Act with discipline.

First Principles of Trading Series Topic 14:
Capital Management for Systematic Trading


Image credit. Joseph, Overseer of Pharaoh's Granaries. Sir Lawrence Alma Tadema, 1874. The biblical account places Joseph's appointment circa 1700 BCE.

23 hours ago | [YT] | 1

Risk1 Reward3 - Systematic Trading

This video builds the architecture that determines whether a trading system compounds or quietly deteriorates.

Four chapters. From reframing capital to a complete operating protocol.

Chapter 1: Capital as Inventory Capital treated as money activates every bias money triggers. Treated as inventory, every deployment becomes a sizing decision with three visible costs.

Chapter 2: The Mathematics of Destruction The geometric return approximately equals the arithmetic return minus half the variance. That single formula explains how traders feel profitable while slowly losing capital.

Chapter 3: Efficient Capital Deployment Grow deployment when capital grows. Shrink it when capital shrinks. The reserve is not idle. It lowers the volatility tax and provides capacity when others are forced to sell.

Chapter 4: The Capital Management Protocol Six principles. One integrity question before every trading day. Is the sizing model built to survive statistical outliers?

What viewers will find. The volatility tax and how it silently compounds against every equity curve. The ergodicity problem that separates what happens across many traders from what happens to one trader over time. And a complete protocol integrating preservation, deployment, and compounding into one operating discipline.

Video 14. First Principles of Trading series.

Think in odds. Act with discipline.

1 day ago | [YT] | 0

Risk1 Reward3 - Systematic Trading

The Fundamental Mathematics of Compounding.

The most trusted number in trading is also the most misleading.

Average return.

A 50% gain followed by a 50% loss.
The average says zero.
The account says minus 25%.

$100,000 → $150,000 → $75,000.

The loss operated on the gain. Not on the original capital. Time remembers what averages forget.

This gap has a name. The volatility tax.

G ≈ E[R] minus σ²/2.

Same 10% arithmetic return:
15% volatility → geometric return: 8.9%
30% volatility → geometric return: 5.5%
50% volatility → geometric return: negative 2.5%

At 50% volatility, the account shrinks every year. While the average says profitable.

Capital management exists to close this gap. Not by increasing the return. By managing the variance that silently extracts from it.

First Principles of Trading Series, Topic 14: Capital Management for Systematic Trading. Coming this Thursday, 8:30 AM EST.

Have you ever compared your arithmetic average to your actual compound growth? What did you find?

Think in odds. Act with discipline.

3 days ago | [YT] | 5

Risk1 Reward3 - Systematic Trading

Capital as Inventory, Beyond Money
Capital in systematic trading is inventory deployed into probabilistic environments.

Key points:
Capital is finite inventory.
Deployment must assume uncertainty, variance, and edge decay.
Survival precedes compounding.

The goal is maximizing longevity adjusted returns.

Core integrity question:
Is your sizing model built to survive statistical outliers?

First Principles of Trading Series,
Topic 14: Capital Management for Systematic Trading.

Image credit - The Parable of the Rich Fool. Rembrandt van Rijn, 1627 · Gemäldegalerie, Berlin

4 days ago | [YT] | 1

Risk1 Reward3 - Systematic Trading

This week we explore capital management for systematic trading.

Capital management is the discipline of sizing every decision so that survival is never in question and compounding is never interrupted.

A mathematical relationship between your edge, your variance, and your ability to stay in the game.

In this exploration we walk through:

> What actually happens to your account when volatility compounds against you Why arithmetic returns lie and geometric returns tell the truth

> How to size positions so that drawdowns stay recoverable

> The difference between growing capital and destroying it slowly while feeling profitable

Capital management is where math meets survival. It is the invisible architecture beneath every equity curve that endures.

First Principles of Trading Series,
Topic 14: Capital Management for Systematic Trading.

Think in odds. Act with discipline.

5 days ago | [YT] | 4

Risk1 Reward3 - Systematic Trading

A clear understanding of why willpower alone cannot overcome the biological stress response

The evidence behind cortisol driven decision degradation and why the prefrontal cortex loses forty percent of its function under sustained stress

A systematic crisis management framework including drawdown thresholds, recovery phases, and real time protocols built from the principles of those who survived when others did not.

6 days ago | [YT] | 0

Risk1 Reward3 - Systematic Trading

Rules tell a trader what to do.
Protocols tell a trader what to do when the brain can no longer follow the rules.

Under sustained stress, cortisol degrades prefrontal cortex function by approximately forty percent. The part responsible for planning, impulse control, and rational analysis. The part where every systematic decision lives.

The amygdala takes over. Risk assessment narrows. Revenge trading begins.

Paul Tudor Jones made 62% returns in 1987. The worst single day crash in history. Not because he predicted it. Because his protocols were already in place before the stress arrived.

Pre crisis thresholds. Real time decision trees. Anti Martingale sizing. Recovery frameworks measured in months, not days.

The distinction is not intelligence or discipline. It is whether the system was built for the operator at full capacity or for the operator under cortisol.

Full breakdown in the latest video.

Think in odds. Act with discipline.

1 week ago | [YT] | 0

Risk1 Reward3 - Systematic Trading

This video explores crisis management for systematic trading. What happens when the brain overrides the system, and how to build protocols that function when the rational mind cannot.

It examines through neuroscience, behavioral finance, and three real case studies why the question is not whether a trader will face a drawdown, but whether the brain will allow the trader to respond to it.

John Coates documented what happens on live trading floors. Cortisol degrades the prefrontal cortex by 40%. The amygdala gains 30% reactivity. Every systematic skill a trader has built lives in the part of the brain that shuts down first.

Three case studies. Barings 1995. LTCM 1998. Archegos 2021. Different decades, different strategies, same destruction pattern.

The video builds a crisis protocol from drawdown thresholds, real time neurochemical management, and phased recovery.

Rules tell you what to do. Protocol tells you what to do when you cannot think clearly enough to follow rules.

Video 13. First Principles of Trading series.

Think in odds. Act with discipline.

1 week ago | [YT] | 0

Risk1 Reward3 - Systematic Trading

"Rules tell you what to do. Protocol tells you what to do when you cannot think clearly enough to follow rules."

Crisis Management for Systematic Trading. Tomorrow. 8:30 AM EST.

1 week ago | [YT] | 0

Risk1 Reward3 - Systematic Trading

When a trader wins, testosterone rises.
Confidence increases.
Focus sharpens.
Risk feels easier.

At first, this helps.
But the cycle becomes self reinforcing.

Success raises testosterone.
Testosterone increases risk appetite.
Risk appetite expands position size and conviction.

This is the winner effect.

In trading, it appears as larger positions, reduced hedging, and the quiet belief that the market has finally been figured out.

Until the regime changes.

Then the biology flips.

When losses begin, cortisol takes over.

In the first minutes, alertness rises.
Soon after, anxiety builds and attention narrows.
Under sustained stress, the rational decision system weakens while the threat system becomes dominant.

For a trader, this means.

The rational brain gets quieter.
The emotional brain gets louder.

The ability to think in probabilities, to follow a plan, and to respect risk degrades exactly when it is needed most.

Impulsive actions, revenge trades, doubling down, and system overrides become easier.

Under cortisol, the brain does not forget the rules.
It loses access to them.

This is why crisis management is a protocol.
It is protection against your own biology.

Think in odds. Act with discipline.

1 week ago (edited) | [YT] | 1