Avoiding fear based decisions

Trading is often about how to take the appropriate risk without exposing yourself to very human flaws.
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abgespaced
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Location: Australia

So I've been studying a little bit of prospect theory, which proposes that one our cognitive biases as humans is that we take bigger risks to avoid loses more than to make profits.

I've noticed this tendency myself in my trading. It's clear in the data- my biggest losses far outweigh my biggest wins.

Knowing that these decisions are driven by fear of loss, how can we mitigate this risk without mitigating our potential winnings?

I'm not a fan of just the lowering your stakes mentality. There's no way to confront this fear without having something at risk that makes you fearful! At least that has been my experience.

There must be another technique or strategy to deal with it. Eg. taking a position, setting your exit point and walking away. Or taking game advice from someone who is not invested in the game. Or setting a predetermined entry point and not taking a position unless those conditions are met 100%. Or.... whatever.

I'm just throwing ideas out there but there must be some successful traders out there who have dealt with this issue and overcome it.
NickH
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Joined: Tue May 21, 2019 7:54 am

abgespaced wrote:
Mon Jan 11, 2021 10:33 am
There must be another technique or strategy to deal with it. Eg. taking a position, setting your exit point and walking away. Or taking game advice from someone who is not invested in the game. Or setting a predetermined entry point and not taking a position unless those conditions are met 100%. Or.... whatever.
I think the things you mention could indeed be a good way to go. Set up a trading plan before starting the day. What will be my entry points? What is my stop-loss? And when do you exit a trade that is moving in your favor? All questions I think are good to have thought about prior to starting your day of trading.
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Derek27
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The mechanics of trading is linked to betting. We all understand that if you're backing horses at 3/1 you need 25% winners to break even, whereas if you're backing at 1/4 you need 80%.

Likewise, you can aim for a 12-tick profit with a stop-loss or provisional bailout of 4 ticks, or aim for a 5-tick profit with a stop-loss of 20 ticks. Having a firm plan as to what risk/reward ratio you're going for and the likelihood of getting the right strike-rate (perhaps from looking at your data) can help mitigate big losses. Better still, avoiding odds-on trades where you're willing to lose more ticks than you win will help.
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newcomer
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I wonder if part of the answer lies in the difference between trading and betting (back and lay) that is to say the correct prediction of price and therefore value, as against trading money orders. I'm of the opinion that i didnt neeed to change to "trading", i was better off as I was, with a pretty good "lay" system (> 6%) and 2 reliable (> 20%) back systems, its just that there didn't always appear to be enough events or system qualifiers to create a regular income, but having traded for a little while, I feel that i can go back to the betting world and be more patient and more successful and get close to hitting the targets that i have from a changed financial situation/perspective - which I've learned from getting pretty close at "trading". The biggest difference for me is that in the "betting" world we concentrate solely on value, every horse race we look at, we know exactly the price that the participants should be, so bringing that to "trading" anything over the price can be backed and greened up when the price drops to the predicted price. Where that differs from the big players on here is that you won't get that situation every time pre-off, because you have calculated on known athletic abilities which won't become apparent until the race is in motion. As against trading money flow, which is like a different world, with different criteria etc. But for me its gambling we're involved in therefore price/value is everything. Where i cringe is when the price is being backed down and down way below what it should be (and way below the in-running price often). Personally I'd work out the prices acurately and never back beneath regardless of what everyone else is doing, similarly be careful placing "lay" bets at the "Back" price; AND the favourite might very well be the best in the race and the likeliist winner, so don't instinctively "lay" it just because the price is right (too low) to do so. Rate your horses, from that calculate price and from that look for the value and trade that. Hopefully picking up some wisdom from those who arrived here from the financial world later to broaden your approach if neccesary.
threedogs
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Joined: Mon Jan 20, 2014 10:24 am

I knoiw nithing about horses but make money from trading
Nobody really knows which way the price will go so I just take a position and if it goes my way I ride it till it levels off then get out with a profit
If it goes against me I scratch it and lose nothing or get out fast for a small loss
This works very well
I know nothing about hoirses trainers jockeys racecourses weather os going ..noithing
Its just a maths thing

easy
Trader Pat
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Joined: Tue Oct 25, 2016 12:50 pm

abgespaced wrote:
Mon Jan 11, 2021 10:33 am

I'm not a fan of just the lowering your stakes mentality. There's no way to confront this fear without having something at risk that makes you fearful! At least that has been my experience.
There shouldn't be a fear to confront when you're trading full stop. If there is then you're over staking and you've kind of answered your own question, just lower your stakes until you're comfortable with the risk you're exposing yourself to.

I think a lot of people misunderstand what being comfortable with your stake actually means. Some people when asked say they would be comfortable laying a horse at 6 for £100 but when that price moves against them down to 5.8 or 5.7 they panic and dump the trade which means they were never comfortable with that stake in the first place.

If you're confident in your ability to read the market and you're truly comfortable with the stakes you're using then you should be able to sit on your hands even if the market moves 5-6 ticks against you, unless the conditions have changed since you placed the initial order in the market. Once you're comfortable with a particular stake then you can increase and just rinse and repeat until you're using bigger stakes.
jamesg46
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Trader Pat wrote:
Wed Jan 13, 2021 6:54 pm
abgespaced wrote:
Mon Jan 11, 2021 10:33 am

I'm not a fan of just the lowering your stakes mentality. There's no way to confront this fear without having something at risk that makes you fearful! At least that has been my experience.
There shouldn't be a fear to confront when you're trading full stop. If there is then you're over staking and you've kind of answered your own question, just lower your stakes until you're comfortable with the risk you're exposing yourself to.

I think a lot of people misunderstand what being comfortable with your stake actually means. Some people when asked say they would be comfortable laying a horse at 6 for £100 but when that price moves against them down to 5.8 or 5.7 they panic and dump the trade which means they were never comfortable with that stake in the first place.

If you're confident in your ability to read the market and you're truly comfortable with the stakes you're using then you should be able to sit on your hands even if the market moves 5-6 ticks against you, unless the conditions have changed since you placed the initial order in the market. Once you're comfortable with a particular stake then you can increase and just rinse and repeat until you're using bigger stakes.
+1 (3rd time, this is getting too much)

https://youtu.be/VTbiFqqlN_g
rik
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Location: London

ignore your net for a market, it doesnt have any influence if a price is too high or low
stake whats appropriate for your bankroll/edge and delete loss avoidance or locking in profit from your mindset
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abgespaced
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Location: Australia

rik wrote:
Thu Jan 14, 2021 1:16 am
ignore your net for a market, it doesnt have any influence if a price is too high or low
stake whats appropriate for your bankroll/edge and delete loss avoidance or locking in profit from your mindset
Awesome, just what I was looking for. Focussing on where the price is vs where it should be. This will reduce any possible fear one might experience if they were just looking at their P&L. "Loss avoidance or locking in profit" creates targets with no relationship to the market price v value. Good stuff.
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marksmeets302
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I've often found that the moments where I almost want to puke because everything is going against me are the ones that provide the biggest opportunity. I think really good traders recognize those situations and are able to stay the course. My trick is to close the position which allows me to think clearly again. If I come to the conclusion the position is right I just get right back in.
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