Question about Mark Douglas, Trading in the Zone, and Risk

Trading is often about how to take the appropriate risk without exposing yourself to very human flaws.
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arbitrage16
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Have just read TITZ, as I like to call it, for a second time and one thing I am not totally clear on is his notion of 'define your risk' which I don't think, funnily enough, he does a very good job of defining.

He suggests that it should be defined before every trade.

if anyone on here could enlighten me, specifically in relation to horse racing, I'd really appreciate it.
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ShaunWhite
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arbitrage16 wrote:
Wed Mar 29, 2017 6:50 pm
Have just read TITZ, as I like to call it, for a second time and one thing I am not totally clear on is his notion of 'define your risk' which I don't think, funnily enough, he does a very good job of defining.

He suggests that it should be defined before every trade.

if anyone on here could enlighten me, specifically in relation to horse racing, I'd really appreciate it.
You've just reminded me I download the audio book as my free selection on my trial on audible.com....i really must listen to it.
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Naffman
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arbitrage16 wrote:
Wed Mar 29, 2017 6:50 pm
Have just read TITZ
Wonder if the writer did that on purpose ;)
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Euler
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I've never read or listened to it, so I suspect it's not a critical part of your journey. Though people seem to like and recommend it so I guess people have found it useful.
Nero Tulip
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Great book on psychology, light on technicalities if I remember correctly, but that sort of stuff you can go elsewhere to fill in... it covers it's topic brilliantly.

Defining risk, can be made complex or kept simple.. it's a public forum and time is short, so simple it is..

Treat risk as the amount you are willing to lose on the trade. It's about defining your entry, your stop loss point and the price you would take your profit, then sizing your positions in order to produce a consistent staking method.

Call the amount you are willing to lose R (as is seemingly popular among some more well known online financial traders, no idea why).. this can be a set amount (level stakes). You then stake / enter a position size that means you will lose 1R if you are forced to exit your trade at your stop loss price. I'll not do the maths for that, I'm sure you can work it out, or if not, google / excel it..

You should attempt to find entries and exits where the upside has a multiple of R that rewards you more than the implied probability of the prices being struck. For example an implied Evens trade has an upside of 1R and a downside of 1R, the sizing of the position is the key to making sure you hit 1R at the prices you have identified. It goes without saying, you want the probability of your upside price being hit first to be greater than 50% (in the case of implied Evens trades) in order to be profitable long term (just like 'value betting').

As Douglas says, losing is part of the game, and the distribution of your wins and losses is random.. so defining your risk (and reward!) like this is an important part of giving your mind the confidence to accept that, and get on with executing your well researched plan, which has (hopefully) identified a repeating pattern of risk/reward setups that are probablistically profitable.

Things get more complex when you begin to have more flexible goalposts and you have to add additional layers of probability to these movements..! Which is why in most cases, it's better to keep things simple.
Nero Tulip
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I should say, "Great book" is perhaps a bit OTT, I remember thinking it gets a tad repetitive at times and can pretty much be distilled down to his 5 (?) golden rules which are worth understanding thoroughly and very much worth the admission fee. Some will have them down as common sense, but actually I remember thinking at the time that a deeper understanding of their meaning might not be so obvious to most people. I'm due a reread of it / them..
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Dallas
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Nero Tulip wrote:
Wed Mar 29, 2017 9:04 pm
I should say, "Great book" is perhaps a bit OTT, I remember thinking it gets a tad repetitive at times
I'de agree with that, after hearing so many ppl talk about it i decided to give it a read (actually i kindly had it bought for me one xmas by a forum member) but by half way through i kept having to check i had nt just re-read a chapter from a few days earlier.
eightbo
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arbitrage16 wrote:
Wed Mar 29, 2017 6:50 pm
...He suggests risk should be defined before every trade.

if anyone on here could enlighten me, specifically in relation to horse racing, I'd really appreciate it.
Your risk going into a trade should be defined in accordance with your trading plan. This is to say that you should have carefully considered the various factors that make up the position you are about to open. For pre-race horse trading, this includes market conditions (volatility/liquidity), the price of the selection, the stake which you will use (considering the price & market conditions), time left until the race starts and so on.

All in all, I would say the aim of defining risk is to establish how much % of your bankroll you can afford to lose after having an idea of how you expect the market to behave most times. Naturally, you would also consider your potential upside. But this is basically down to whatever your approach is - determine how many losses you can take in a row during a time of drawdown and stake appropriately so that you can survive a bad day/week/month.

If you don't properly define your risk, you are opening yourself up to stake size issues such as improper stake sizing which can either reduce your efficiency (gaining less £ with the exact same results) or lead to ruin (For example if your stake sizes are bigger than 2x Kelly).

However, if you define your risk appropriately so that your profits and gains from each market fit within a consistent range, you can grasp how well you are performing quicker and adjust accordingly, increasing your efficiency.

Whilst Mark Douglas is likely talking about defining risk with regards to putting on a trade, you must understand that risk applies to everything and the more you account for risk, the more cash you can save yourself in the long run. For example, let's say you have a power cut at just the wrong time. You go on to lose 100% of your stake because you couldn't get back in time. You then setup a backup laptop with a separate internet connection so this doesn't happen again. A few months later you can't close your position because Betfair servers are under a particular amount of stress that day and your backup laptop is also no good here. Did you have the foresight to have a betdaq or other exchange account ready to roughly close out your position?

Sometimes you need to be a bit creative but ultimately take a what could go wrong? attitude.

In the example I just gave, we can see that the person did not adjust for the risk until they had experienced it first-hand. If you can learn to consider risks you have not experienced this can help you immensely, not just in trading but in life overall.

I can think of countless examples of real life situations but i'll give just one: You have something important scheduled and you decide to go by train, only to find out that the train was so full there was no space. You have to wait for the next one and end up being late. Let's say you made some food before heading off for the train journey. Identifying the fact that you might not be able to get the train you want even if you're not on time is a pretty simple risk but you'd be surprised how many people don't consider this until they have had the experience first-hand of being late in such a way. Something as simple as getting an earlier train and then finding some food once you have arrived in order to kill the time before your meeting would be a much more efficient approach.

Whilst it's skipped by many because humans generally find this kind of thing extremely boring, it's my belief that understanding risk and money management overall are a necessary basis to succeed in trading. The fact that many people skip risk just means the skill/knowledge acquired is that much more valuable to those who have put in the effort.

If you can come to see trading in this way, you will surely see improvement as time passes. Good luck.
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ruthlessimon
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Nice post, the "other forum" getting a bit dull Eight? :D
eightbo
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Constantly looking to surround myself with others opinions and content to keep me in check, have lurked on here long enough.
Forever on the grind... :)
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Kai
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Thanks for posting this, was looking for something from Mark Douglas. Not much of a bibliophile so this is perfect.
stueytrader
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I have read several authors on trading psychology (partly because I have a natural interest in psychology, also because I trade - of course).

Mark Douglas is interesting in his background, as apparently he admitted himself he failed as a trader (at least earlier in his career, not sure of later). I take that as a big motivation issue, that even someone as renowned as him showed how easy it is to fail at trading earlier in a career. Then also, to grow and develop and come to understand oneself much more over time and experience in trading.
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Euler
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I've always been a bit sceptical on people who give advice having failed at something. It's easy to fail at anything, but it's much harder to fail then turn things around. That's who I want to learn from.
stueytrader
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Euler wrote:
Thu Jan 16, 2020 11:41 am
I've always been a bit sceptical on people who give advice having failed at something. It's easy to fail at anything, but it's much harder to fail then turn things around. That's who I want to learn from.
Yes, a valid point and probably right to be sceptical. However, I'm not sure whether he continued to fail in later times (don't have all the knowledge on that). One would presume he improved his own trading, given he's such as guru!
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