Define risk
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Trader333
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There are two things to consider here in my view:
1) Account Exposure
2) Amount you are prepared to lose before closing the trade
Most of the conversation so far has focused on (2) above but (1) should be considered when trading in stocks and a simple way of doing so is to say "If the stock were to suddenly drop to 0, would I be OK with the loss ?"
So in my view consideration should be given to total exposure and this is easily calculated as follows:
Number of shares traded x Price at point trade was made. So if a share is £20 and you buy 1000 your account exposure is 20 x 1000 = £20K and if the share price suddenly dropped to 0 then your maximum loss is £20K.
Paul
1) Account Exposure
2) Amount you are prepared to lose before closing the trade
Most of the conversation so far has focused on (2) above but (1) should be considered when trading in stocks and a simple way of doing so is to say "If the stock were to suddenly drop to 0, would I be OK with the loss ?"
So in my view consideration should be given to total exposure and this is easily calculated as follows:
Number of shares traded x Price at point trade was made. So if a share is £20 and you buy 1000 your account exposure is 20 x 1000 = £20K and if the share price suddenly dropped to 0 then your maximum loss is £20K.
Paul
DISCRETIONARY vs. SYSTEMATIC RISK
Discretionary trading on an intraday basis seems much riskier than systematic trading. Why do you think those outcomes are the way they are? There is the idea in some circles that those who are older or have been in the brokerage business do not make good discretionary traders, proprietary or otherwise. Is there a remedy for that, if in fact that is correct? Would the overall success rate be higher with a systematic approach or by simply disengaging from the whole endeavor? Thanks in advance for your insight. --Craig
The NYSE specialists have been making money for 200 years, and we teach our traders how to trade on the same side as the specialist. We do opening-only orders (based on fair value calculations) and we "outside envelope" the basic markets to take advantage of trade-throughs (price improvements, guaranteeing we are on the same side as the specialist).
As former exchange floor traders, we understand we make money by responding to the market. I often use a baseball metaphor, of the batter (trader) responding to the ball being pitched (by the market/pitcher), wherein we can't possibly have a systematic approach to an unknown factor (the pitch). If we were to say we want to swing at a 70-degree angle with a swing speed of 18 miles per hour (MPH), it obviously wouldn't work, since the pitcher is throwing the ball all over the place.
There are systems that work for a while, and we have traders with great black boxes (fully automated reactions to the market), but they need constant tweaking to stay successful. We have more traders who make money by knowing what their response will be to a possible variable (Federal Reserve chairman Alan Greenspan speaking, market breakouts, and so forth), and doing the same profitable strategies, day after day (opening only, enveloping, and so on).
If a system worked forever, there would not even be a marketplace, since everything would be absolutely predictable. Systems work until they don't, but - as long as we have a free marketplace - discretionary traders will be able to make money forever.
Discretionary trading on an intraday basis seems much riskier than systematic trading. Why do you think those outcomes are the way they are? There is the idea in some circles that those who are older or have been in the brokerage business do not make good discretionary traders, proprietary or otherwise. Is there a remedy for that, if in fact that is correct? Would the overall success rate be higher with a systematic approach or by simply disengaging from the whole endeavor? Thanks in advance for your insight. --Craig
The NYSE specialists have been making money for 200 years, and we teach our traders how to trade on the same side as the specialist. We do opening-only orders (based on fair value calculations) and we "outside envelope" the basic markets to take advantage of trade-throughs (price improvements, guaranteeing we are on the same side as the specialist).
As former exchange floor traders, we understand we make money by responding to the market. I often use a baseball metaphor, of the batter (trader) responding to the ball being pitched (by the market/pitcher), wherein we can't possibly have a systematic approach to an unknown factor (the pitch). If we were to say we want to swing at a 70-degree angle with a swing speed of 18 miles per hour (MPH), it obviously wouldn't work, since the pitcher is throwing the ball all over the place.
There are systems that work for a while, and we have traders with great black boxes (fully automated reactions to the market), but they need constant tweaking to stay successful. We have more traders who make money by knowing what their response will be to a possible variable (Federal Reserve chairman Alan Greenspan speaking, market breakouts, and so forth), and doing the same profitable strategies, day after day (opening only, enveloping, and so on).
If a system worked forever, there would not even be a marketplace, since everything would be absolutely predictable. Systems work until they don't, but - as long as we have a free marketplace - discretionary traders will be able to make money forever.
SOCRATES
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Now wait a minute, what you are talking about is not a system, it is a method, which is something very different whether it is applied as part of a strategy using black boxes or whatever other artificial aid is made available to enhance judgement., and not to replace it.
Socrates,
System, method, in respect to whom?
The NYSE Specialists have the benefit of the system in which to ply their method.
The "retail prop shops" have the method, but lack the system, thus will only ever try to shadow the Specialist, thus by definition will fail to see the profit they know is available, but can only dream about.
Therefore, one is risk minimal, due to the system, one is risk management due to the method.
cheers d998
System, method, in respect to whom?
The NYSE Specialists have the benefit of the system in which to ply their method.
The "retail prop shops" have the method, but lack the system, thus will only ever try to shadow the Specialist, thus by definition will fail to see the profit they know is available, but can only dream about.
Therefore, one is risk minimal, due to the system, one is risk management due to the method.
cheers d998
c6ackp
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Cards/Markets
Anyone who has experienced the "death by a thousand stops" syndrome will know that you need to risk something to gain something. It's knowing the game inside out and appying your edge systematically which separates the gamblers/hopers from the professionals.
There was a famous card-counter called Revere who developed one of the earliest systematic approaches to beating Blackjack. He later went on to win millions on the financial markets.
I spent 9 months in Vegas card counting and several years later got interested in financial markets. Both activities "feel" pretty-much identical to me - all the principles are the same, as the trick is to see through the chaos/complexity using coarse-grain models and manage the risk in a systematic way.
Steve
Anyone who has experienced the "death by a thousand stops" syndrome will know that you need to risk something to gain something. It's knowing the game inside out and appying your edge systematically which separates the gamblers/hopers from the professionals.
There was a famous card-counter called Revere who developed one of the earliest systematic approaches to beating Blackjack. He later went on to win millions on the financial markets.
I spent 9 months in Vegas card counting and several years later got interested in financial markets. Both activities "feel" pretty-much identical to me - all the principles are the same, as the trick is to see through the chaos/complexity using coarse-grain models and manage the risk in a systematic way.
Steve
c6ackp,
I would have to disagree with you here.
The Financial markets differ from card counting fundamentally in several important respects.
Regardless of the number of card packs used, there are a finite # of cards, whose gross # are a known fact. Through your counting skills, you will know the net # remaining at any given point in time. This will allow a probability calculation to be made, and through your bet size, manage the risk that the probability goes against you.
Financial markets, differ importantly in the respect that the variables are in themselves variable, and are not fixed as in the # of cards in play. That the future, may change all the current variables into variables different from the ones that the trade was taken on.
The dealer, in blackjack, can see your bet, but cannot change the card he must draw.
The market maker, can see your cards, see your bet, and then change the cards if he so chooses, this alters any "probability" calculation you have made, as next to useless.
The other people in the "game" of blackjack, are unable to influence, change, or manipulate the flow of cards, or your decision process, or the probability of the next card conforming to your calculation. They must play their hand to the best of their ability, and then wait for the dealer to complete. Whether they ultimately win, lose, draw, has no impact on you other than the cards they have consumed.
In the market, this is completely untrue. Other participants will effect changes in the market, before ,during, and after you have placed your bet (position), and may well influence the market maker into changing his position, as their position demands greater respect from the market maker due to greater $$ value.
The amount of money.......in blackjack is fairly irrelevant, the house will rarely be threatened, but assuming for a moment that it is, will not let you play at that size.
However, as already stated, your bank size is irrelevant to the outcome of the game, the cards only will determine the outcome.
In the market, the size of your bank has a huge input into the final outcome.
Without dragging on, the analogy of blackjack to the market, apart from very superficially, lacks all logical, and penetrating thought.
cheers d998
I would have to disagree with you here.
The Financial markets differ from card counting fundamentally in several important respects.
Regardless of the number of card packs used, there are a finite # of cards, whose gross # are a known fact. Through your counting skills, you will know the net # remaining at any given point in time. This will allow a probability calculation to be made, and through your bet size, manage the risk that the probability goes against you.
Financial markets, differ importantly in the respect that the variables are in themselves variable, and are not fixed as in the # of cards in play. That the future, may change all the current variables into variables different from the ones that the trade was taken on.
The dealer, in blackjack, can see your bet, but cannot change the card he must draw.
The market maker, can see your cards, see your bet, and then change the cards if he so chooses, this alters any "probability" calculation you have made, as next to useless.
The other people in the "game" of blackjack, are unable to influence, change, or manipulate the flow of cards, or your decision process, or the probability of the next card conforming to your calculation. They must play their hand to the best of their ability, and then wait for the dealer to complete. Whether they ultimately win, lose, draw, has no impact on you other than the cards they have consumed.
In the market, this is completely untrue. Other participants will effect changes in the market, before ,during, and after you have placed your bet (position), and may well influence the market maker into changing his position, as their position demands greater respect from the market maker due to greater $$ value.
The amount of money.......in blackjack is fairly irrelevant, the house will rarely be threatened, but assuming for a moment that it is, will not let you play at that size.
However, as already stated, your bank size is irrelevant to the outcome of the game, the cards only will determine the outcome.
In the market, the size of your bank has a huge input into the final outcome.
Without dragging on, the analogy of blackjack to the market, apart from very superficially, lacks all logical, and penetrating thought.
cheers d998
c6ackp
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d998 - Yes, I totally agree with you. Of course the game is different, you could've said that blackjack involves a green baize but the markets do not.
It's specifically "dealing with complexity" (regardless of how that complexity is derived) in a systematic way and applying your edge which is the common denominator. That's all I meant. Apologies if that is blindingly obvious, but I do find it fascinating that trading seems to have analogies with all sorts of activities and physical processes. For example, fib ratios are also found in the structure of DNA.
This is not true though. Every blackjack system relies on the subtle shift in probable outcomes resulting from the current composition of the deck(s). The card counter positions him/herself at last base specifically because the other players *are* influencing the flow of cards with their decisions of whether to hit or stand. These decisions by other participants control the amount and denomination of cards available to the card-counting model and they therefore *do* affect the flow of cards, your decision process and the probability of the next card conforming to your calculation.
Both fun and challenging activities though
Steve
It's specifically "dealing with complexity" (regardless of how that complexity is derived) in a systematic way and applying your edge which is the common denominator. That's all I meant. Apologies if that is blindingly obvious, but I do find it fascinating that trading seems to have analogies with all sorts of activities and physical processes. For example, fib ratios are also found in the structure of DNA.
This is not true though. Every blackjack system relies on the subtle shift in probable outcomes resulting from the current composition of the deck(s). The card counter positions him/herself at last base specifically because the other players *are* influencing the flow of cards with their decisions of whether to hit or stand. These decisions by other participants control the amount and denomination of cards available to the card-counting model and they therefore *do* affect the flow of cards, your decision process and the probability of the next card conforming to your calculation.
Both fun and challenging activities though
Steve
c6,
Positioning oneself at "last-base" is however within your control. I presume that should this seat be taken, you may refrain from participating.
It is this element of control that validates the theory of probability in BJ.
As to the cards being consumed by other players, this is a fact, and will be mitigated to a larger or lesser extent upon your counting ability. That is to say, if the card(s) you require are consumed prior to your deal, and probabilities suggest that folding or simply relying on luck, to see your hand out, rather than increasing the stake, then again this is under your control at that moment. In the markets, players to your right, can still be drawing cards if they wish, at the table, players to your right, when finished, are finished, they can no longer exert an influence.
Your ability however in the market does not confer, within speculation, the same advantage as it does in cards.Card counters, especially, the good ones, are barred from casino's as soon as they become known. How many speculators in the market, have ever been banned?
Is it? If true, it's certainly not a card game. But I would contend that the markets, repeat the same message incessantly. The key is to understand the message, and count those cards.
cheers d998
Positioning oneself at "last-base" is however within your control. I presume that should this seat be taken, you may refrain from participating.
It is this element of control that validates the theory of probability in BJ.
As to the cards being consumed by other players, this is a fact, and will be mitigated to a larger or lesser extent upon your counting ability. That is to say, if the card(s) you require are consumed prior to your deal, and probabilities suggest that folding or simply relying on luck, to see your hand out, rather than increasing the stake, then again this is under your control at that moment. In the markets, players to your right, can still be drawing cards if they wish, at the table, players to your right, when finished, are finished, they can no longer exert an influence.
Your ability however in the market does not confer, within speculation, the same advantage as it does in cards.Card counters, especially, the good ones, are barred from casino's as soon as they become known. How many speculators in the market, have ever been banned?
Is it? If true, it's certainly not a card game. But I would contend that the markets, repeat the same message incessantly. The key is to understand the message, and count those cards.
cheers d998
timsk said:
yes , and when someone confronts them that they are indeed gamblers , they try to save face with the old BS line " oh but all trading is gambling really " .
Interesting to note how many of these " gambler hidden behind a trading veil " types there are here .
which means that REAL traders on this board are rare.
So everyone has there own definition of risk, but how to quanify it is another matter. The fact is there is a risk but what variable define the risk, what is the impact of the risk, how to measure the risk. we will all come up with different answers but it would be interesting to see how other traders tackle these risks and use them
c6ackp
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At a black box level it's pretty similar. The card counter is feeding the information available (which is very limited compared to the markets) into the game model. The model then provides a decision based on the most probable outcome. The strength of the card-counter's signal determines the bet size which could be compared to scaling into a larger position on the back of a strong trading signal.
Of course there are a ton of differences also, e.g.: you have to play every hand in Blackjack - this is not advisable in trading; in trading you can wait to see if you are right, before you increase your bet, etc.
Anyway the subject of this thread is "Define risk". Is there any "risk" in (systematic) trading? I don't see any risk beyond my stop loss. Unless there's a catastrophic event: e.g. no stops honoured, the brokers get shafted who, in turn, shaft us, etc. Not sure we can do much about that sort of catastrophic risk, can we?
Riding my motorbike, driving my car, etc. has risk as *any* outcome is possible, but a -20 pip auto stop loss is no surprise.
Steve
Of course there are a ton of differences also, e.g.: you have to play every hand in Blackjack - this is not advisable in trading; in trading you can wait to see if you are right, before you increase your bet, etc.
Anyway the subject of this thread is "Define risk". Is there any "risk" in (systematic) trading? I don't see any risk beyond my stop loss. Unless there's a catastrophic event: e.g. no stops honoured, the brokers get shafted who, in turn, shaft us, etc. Not sure we can do much about that sort of catastrophic risk, can we?
Riding my motorbike, driving my car, etc. has risk as *any* outcome is possible, but a -20 pip auto stop loss is no surprise.
Steve
SOCRATES
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Steve, I can see what you are getting at, but you are not explaining this properly and you are inadvertently baffling the audience, many of whom do not know what a card counter actually does, in a gaming room, in a casino where blackjack is being played.c6ackp said:At a black box level it's pretty similar. The card counter is feeding the information available (which is very limited compared to the markets) into the game model. The model then provides a decision based on the most probable outcome. The strength of the card-counter's signal determines the bet size which could be compared to scaling into a larger position on the back of a strong trading signal.
Of course there are a ton of differences also, e.g.: you have to play every hand in Blackjack - this is not advisable in trading; in trading you can wait to see if you are right, before you increase your bet, etc.
Anyway the subject of this thread is "Define risk". Is there any "risk" in (systematic) trading? I don't see any risk beyond my stop loss. Unless there's a catastrophic event: e.g. no stops honoured, the brokers get shafted who, in turn, shaft us, etc. Not sure we can do much about that sort of catastrophic risk, can we?
Riding my motorbike, driving my car, etc. has risk as *any* outcome is possible, but a -20 pip auto stop loss is no surprise.
Steve
A card counter observes all the cards being dealt, and the sequence in which they come out.
This stream he memorises using very short term memory. He has to use the short term memory faculty because in the next reshuffle of the cards in the shoe he has to start memorising the stream all over again. If he used tong term memory the result would not be desireable, this is becuase difficulty would be encountered in "rubbing out" the previous sequence and replacing it with another sequence, which would be the current stream.
In darksiding, in which only the progression of the price is used, the same principle applies.
The stream of numbers, not cards, is clocked, memorised, held, and released at the other end as new numbers appear. Inbuilt into this method is the ability to recognise when a particular number re occurs, which may signify a level.
The process is very similar in abstraction to what a point and figure chart looks as a chart.
Then therefore what a card counter does is similar to what a trader does but for different reasons.
SOCRATES
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There is this saying that says "Beauty is in the eye of the beholder".tomcat said:
This implies that different people percieve differently. What may be beautiful to someone may not be to someone else.
In trading, "risk is as is to the trader."
I will explain a bit.
To someone who knows nothing about this, it would appear that the risk is huge and all of it is gambling.
To someone who knows a great deal about this, it is not gambling nor is the risk so great, if you know what you are doing and make provision to protect yourself.
P.S.,
By the way, look at what these cheeky blighters are doing with the price now, taking liberties, and frightening almost everybody. Ha ! HA ! Ha ! Have a nice day, Tomcat.
Kind Regards,
commanderco
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We are all surrounded by risk .....for most people they prefer to view risk as an abstract component in their lives and thereby do not have to deal with it . They simply close their minds and decide that the issue
is beyond their control.
Cards and trading are similar in that risk can be quantified and therefore dealt with.
The risk in cards is greatly reduced by memorising the cards that have been played and the risk in trading
can be reduced by the method of your trading style.
Because people inherently do not like to confront naked risk, they are at first drawn towards black box
trading and mechanical trading as the risk decision is taken from their hands, even though they may have designed the mechanical system themselves.
The move away from mechanical trading to discretionary is the final step in my opinion of finally acknowledging the markets are organic and cannot be stopped in time like a hand of blackjack and
that you now fully accept the responsibility of being a trader.
Whether this means 65% accuracy or 20 pips of stoploss is entirely up to you.
is beyond their control.
Cards and trading are similar in that risk can be quantified and therefore dealt with.
The risk in cards is greatly reduced by memorising the cards that have been played and the risk in trading
can be reduced by the method of your trading style.
Because people inherently do not like to confront naked risk, they are at first drawn towards black box
trading and mechanical trading as the risk decision is taken from their hands, even though they may have designed the mechanical system themselves.
The move away from mechanical trading to discretionary is the final step in my opinion of finally acknowledging the markets are organic and cannot be stopped in time like a hand of blackjack and
that you now fully accept the responsibility of being a trader.
Whether this means 65% accuracy or 20 pips of stoploss is entirely up to you.
