Loss Recovery Systems

[Kai]

Yeah, prerace markets can be a bit of a nightmare for the more one-dimensional approaches, so it's no surprise to see a lot of new people struggle. But this topic goes far bigger than prerace markets, which is a market where I mostly used scalping approaches and have no interest in (manually) swinging it anymore I'm pretty sure.

I say it's a very big topic because a lot of traders average out (spread out) their exits, but they don't really average their entries to that same extent, so their entry is mostly one-dimensional.

And why is that? Just because it gets a bit uncomfortable managing a position from the red side?

"Oh noes, I didn't get my flat stake entry spot on and I've made a bit of a loss because my trade didn't instantly run into profit. Ah well, I guess I'm supposed to automatically accept this loss now, like a good trader is supposed to."

Is it as clear-cut like that or is there more to it?

I feel it's hard to be so defensive with entries when the market itself is so aggressive, so for me it makes more sense to be more aggressive. I've seen even complete newbies manage their exits like a pro, almost on autopilot because they've seen others do it so many times in videos, so it's obviously not difficult to manage your position when it goes well from the start, but I think what makes or breaks a trader is how well he manages his losses and less than ideal entries etc.

I think the reason why people talk about "doubling up" and martingale is because a lot of people use flat staking, so as soon as you add the second stake you basically already "doubled up" on your trade and it feels like you're chasing losses etc, that's what I mean when I say position management becomes one-dimensional and you're forcing yourself or the market to be either right or wrong, without much middle ground. When in reality most of my actual trading is composed of middle ground stuff, for the most part I average out my results whether I'm right or wrong, if that makes sense

I for example like to be more flexible and stake only according to my confidence, which depending on what I'm trying to do usually means I spread out my initial entries with smaller stakes and then manage the position size from there accordingly, so I regularly add to the position whether it's going in profit or loss, for as long as I feel I'm taking decent valuable prices. Depending on price range I may spread out the entries every 2 or 3 ticks, and sometimes I read it wrong and the market ends up endlessly pushing against me but I'm usually often within scratching distance anyway because I keep adding and taking stakes out and buying myself a tick or two space etc. On the rare occasion that the market is completely one-dimensional with its fillrate and I'm unable to get anything matched on the other side, then I either have to start taking some losses or sit on it for a while if it's temporary and evaluate.

It's obviously not an exact science and sometimes I get pushed a bit more into loss, but usually doesn't take much at all for my position to start looking healthy again, and the upside can be pretty good from that point on as you can imagine. I confess that I am a bit lazy with my entries and like to get involved as soon as possible without patiently waiting for good entries, which means I sometimes play the averaging game.

In other words, I arrive at a market and do a rough evaluation of the ranges and then just try to get matched at what I consider good prices, and while I wait for bigger swings of price to come (if they even come) I try to make the most of the market noise by adding more ticks to my position from scalps and such, so the odds are always stacked in my favor, so to speak.

[Kai]

My problem and what I couldn't figure out was if a loss avoidance system or whatever you want to call it wouldn't lose 100% of the time in the long run like a conventional martingale but would in fact be profitable over time but this time period and the stochastic process left it difficult to see the end of the road when large losses are warping our perception. So bottom line, I was wondering if long sequences of winning races were overcoming the large losses but it took maybe a much longer sample size to prove profitability than many people were allowing for.

Imho herein lies the problem, if you approach it from the loss avoidance angle. Because it doesn't really have anything to do with avoiding losses, it's just about managing your position (risk), or it should be at least. If you're countering a trend why expect every time that it's going to turn soon as you enter, when it's more sensible to expect that you may not catch the best possible price the vast majority of time.

Position/risk management shouldn't be underestimated, I have seen enough of Peter's videos by now that I could almost bet my whole bank on a claim that if you open completely random positions on any prerace market and then tell Peter to manage them from there, I'm pretty sure he would still end up in profit most of the time.

And then all this begs the ultimate question, are entries vitally important for every trading approach? I don't think so, for some of my approaches they certainly don't have to be spot on, I may increase stakes tenfold but only if I get a great read on a market and I'm dead certain of something, and for the rest I try to be as flexible as possible, entirely depending on how volatile my market is.

[Derek27]

Welcome Morbious

From my personal perspective I do use Loss Recovery with great success, and long-term. I formulated my own system that is rather aggressive and used in my automation strategies. I think it works for some, and not others. And I think some members will listen to the responsible advice given by the Gambling Commission.

Good luck
Minnie LAI

'Loss recovery' is quite a broad term, but any strategy that involves increasing stakes or placing bets purely and solely because a previous bet lost is mathematically flawed. If such a system makes a profit it's not necessarily the staking plan that works but the strategy itself.

Am I being ignorant Derek because it seems to me to be different in regards to trading because your first "loss" isn't a loss if you don't take it. Many financial traders don't use stop losses and granted these are longer term markets as Peter alluded to in one of his replies. However a second larger entry not only has the ability to erase the previous "loss" but is entering the market at a new "breakeven" in a market that wildly oscillates. But I understand your point in that if such a staking system works then its the strategy and not the system but I do know that such systems work under certain circumstances albeit tiny and was wondering if this applied to horse racing pre-race markets. Or is the market simply behaving in a way that essentially makes such a strategy a "martingale" by default???

There's nothing wrong with chucking in a second trade and doubling up if that was your intention. For example, if you want to lay £100 in a volatile market you might spread the trade along the ladder, throw in a couple of £10s followed by a couple of £20s. What I'm saying is, if you open a trade with the intention of closing for a few ticks profit, the trade goes against you, and you add to that trade purely to recover your losses or move the scratch point without having any real evidence or reasoning that the price will rebound, that's the same as the Martingale. It's also, for traders that suffer or have suffered from loss-aversion, hard to distinguish between a positive position and simply avoiding that red.

[Derek27]

it must be skewed in that way because your winning more if you dont hit the 10 losing sequence in the 1023 bets
if you dont hit it you double up, but if you hit the losing sequence you still have the bets you won before you hit it, say you hit it after 500 wins your only down about half of your initial bank

You just made me realise I'm not sure what the rules for the Martingale are when you're out of funds. Do you quit or throw what's left of your bank until you've recovered the money?

[Dallas]

it must be skewed in that way because your winning more if you dont hit the 10 losing sequence in the 1023 bets
if you dont hit it you double up, but if you hit the losing sequence you still have the bets you won before you hit it, say you hit it after 500 wins your only down about half of your initial bank

You just made me realise I'm not sure what the rules for the Martingale are when you're out of funds. Do you quit or throw what's left of your bank until you've recovered the money?

Call 0808 8020 133

[Morbius]

'Loss recovery' is quite a broad term, but any strategy that involves increasing stakes or placing bets purely and solely because a previous bet lost is mathematically flawed. If such a system makes a profit it's not necessarily the staking plan that works but the strategy itself.

Am I being ignorant Derek because it seems to me to be different in regards to trading because your first "loss" isn't a loss if you don't take it. Many financial traders don't use stop losses and granted these are longer term markets as Peter alluded to in one of his replies. However a second larger entry not only has the ability to erase the previous "loss" but is entering the market at a new "breakeven" in a market that wildly oscillates. But I understand your point in that if such a staking system works then its the strategy and not the system but I do know that such systems work under certain circumstances albeit tiny and was wondering if this applied to horse racing pre-race markets. Or is the market simply behaving in a way that essentially makes such a strategy a "martingale" by default???

There's nothing wrong with chucking in a second trade and doubling up if that was your intention. For example, if you want to lay £100 in a volatile market you might spread the trade along the ladder, throw in a couple of £10s followed by a couple of £20s. What I'm saying is, if you open a trade with the intention of closing for a few ticks profit, the trade goes against you, and you add to that trade purely to recover your losses or move the scratch point without having any real evidence or reasoning that the price will rebound, that's the same as the Martingale. It's also, for traders that suffer or have suffered from loss-aversion, hard to distinguish between a positive position and simply avoiding that red.

I just replied to this post and lost it

You make an interesting point Derek but am I right in thinking that you are advocating having say a fixed lay liability in your example with your £100 and then instead of a one hit or two hit process you are spreading with entries of say 10-10-10-10-20-20-20 instead of say 40-60??? The problem I have been experiencing is that my plan of several entries that I have spread out over a significant distance has still been struggling in 1-2 races per day on average where the price has simply moved in one direction and never retraced enough to offset the additional spreads and losses. Then the market tanks as it approaches SP and I am looking at a big red. I can't see how in long trending markets that don't retrace how a gentle spread like that can offset a red screen without being aggressive. Another problem with my approach is the scalability of it as aggressively increasing stakes will also hit liquidity problems especially in weaker markets.

Am I missing something or as Peter says, should I just take my losses like a man

[Morbius]

it must be skewed in that way because your winning more if you dont hit the 10 losing sequence in the 1023 bets
if you dont hit it you double up, but if you hit the losing sequence you still have the bets you won before you hit it, say you hit it after 500 wins your only down about half of your initial bank

You just made me realise I'm not sure what the rules for the Martingale are when you're out of funds. Do you quit or throw what's left of your bank until you've recovered the money?

Call 0808 8020 133

Without Googling it, let me guess what that number is

[Morbius]

Yeah, prerace markets can be a bit of a nightmare for the more one-dimensional approaches, so it's no surprise to see a lot of new people struggle. But this topic goes far bigger than prerace markets, which is a market where I mostly used scalping approaches and have no interest in (manually) swinging it anymore I'm pretty sure.

I say it's a very big topic because a lot of traders average out (spread out) their exits, but they don't really average their entries to that same extent, so their entry is mostly one-dimensional.

And why is that? Just because it gets a bit uncomfortable managing a position from the red side?

"Oh noes, I didn't get my flat stake entry spot on and I've made a bit of a loss because my trade didn't instantly run into profit. Ah well, I guess I'm supposed to automatically accept this loss now, like a good trader is supposed to."

Is it as clear-cut like that or is there more to it?

I feel it's hard to be so defensive with entries when the market itself is so aggressive, so for me it makes more sense to be more aggressive. I've seen even complete newbies manage their exits like a pro, almost on autopilot because they've seen others do it so many times in videos, so it's obviously not difficult to manage your position when it goes well from the start, but I think what makes or breaks a trader is how well he manages his losses and less than ideal entries etc.

I think the reason why people talk about "doubling up" and martingale is because a lot of people use flat staking, so as soon as you add the second stake you basically already "doubled up" on your trade and it feels like you're chasing losses etc, that's what I mean when I say position management becomes one-dimensional and you're forcing yourself or the market to be either right or wrong, without much middle ground. When in reality most of my actual trading is composed of middle ground stuff, for the most part I average out my results whether I'm right or wrong, if that makes sense

I for example like to be more flexible and stake only according to my confidence, which depending on what I'm trying to do usually means I spread out my initial entries with smaller stakes and then manage the position size from there accordingly, so I regularly add to the position whether it's going in profit or loss, for as long as I feel I'm taking decent valuable prices. Depending on price range I may spread out the entries every 2 or 3 ticks, and sometimes I read it wrong and the market ends up endlessly pushing against me but I'm usually often within scratching distance anyway because I keep adding and taking stakes out and buying myself a tick or two space etc. On the rare occasion that the market is completely one-dimensional with its fillrate and I'm unable to get anything matched on the other side, then I either have to start taking some losses or sit on it for a while if it's temporary and evaluate.

It's obviously not an exact science and sometimes I get pushed a bit more into loss, but usually doesn't take much at all for my position to start looking healthy again, and the upside can be pretty good from that point on as you can imagine. I confess that I am a bit lazy with my entries and like to get involved as soon as possible without patiently waiting for good entries, which means I sometimes play the averaging game.

In other words, I arrive at a market and do a rough evaluation of the ranges and then just try to get matched at what I consider good prices, and while I wait for bigger swings of price to come (if they even come) I try to make the most of the market noise by adding more ticks to my position from scalps and such, so the odds are always stacked in my favor, so to speak.

Great post Kai and even though I didn't put a lot of detail in my OP, you have basically nailed it with regards what I am struggling with. In my previous post to Derek I mentioned about averaging in and in another post I mentioned that I have a very high strike rate (which is probably common) but struggling to get ahead. My problem races are the ones where the market just trends at a certain point and doesn't retrace enough to offset the red screen losses and additional spreads from further entries and the end result is a big loss when the market tanks as it approaches SP. Now there have been times where I missed a chance to scratch or almost scratch and didn't take it and you mentioning scratching in your post made me think of these instances and it resonated with me.

I can honestly say that I took a big loss because I was trying to force a green screen and probably got what I deserved and this is very similar to gamma risk in ATM options close to expiry. Do you think as you place further entries down the spread and your entry stakes are escalating that a scratch trade should be your objective to avoid big losses????

[Kai]

I think people like yourself that already come into the market armed with some of the more advanced market knowledge have a much higher chance of surviving and thriving overall, so well done I guess For example if you are able to recognize when the trending phase ends and the ranging phase begins like you've mentioned, and so on. I mean, some of these things can still elude people with years of market experience and it's a massive advantage if you're even aware of that after just 500 markets, lol.

I can honestly say that I took a big loss because I was trying to force a green screen and probably got what I deserved and this is very similar to gamma risk in ATM options close to expiry. Do you think as you place further entries down the spread and your entry stakes are escalating that a scratch trade should be your objective to avoid big losses????

I think so, sometimes I'd rather get out for around scratch if opportunity presents itself rather than face an annoying uphill battle, and I'll rather wait for market to level out a bit before maybe going back in. If the market wants to give you a much better price then by all means you should probably let it In some cases it would make more sense to reverse my original position but that thought rarely crosses my mind during that trade, only after, because your mind is too busy "managing a bad trade" That's probably something I can work on actually, somehow getting rid of that little bias would make some markets a lot easier.

But my markets last for a while so I get several cracks at them, and I know the ranges on them quite well, so IDK, maybe for prerace you should stick to the more competitive races with smaller ranges. Hard to tell only based on my own trading, but I think if you're doing your averaging right then your occasional bigger loss should be somewhere around your bigger win, and you should have a lot more of those wins than losses. I think I get about 1 losing market per P&L page on average, and it's usually a smaller one, but that's not an accurate assessment of averaging approaches since the results include scalping and other stuff. So your 90% hitrate is not far off probably, so maybe you just have to manage the worst markets better.

[Morbius]

I think people like yourself that already come into the market armed with some of the more advanced market knowledge have a much higher chance of surviving and thriving overall, so well done I guess For example if you are able to recognize when the trending phase ends and the ranging phase begins like you've mentioned, and so on. I mean, some of these things can still elude people with years of market experience and it's a massive advantage if you're even aware of that after just 500 markets, lol.

I can honestly say that I took a big loss because I was trying to force a green screen and probably got what I deserved and this is very similar to gamma risk in ATM options close to expiry. Do you think as you place further entries down the spread and your entry stakes are escalating that a scratch trade should be your objective to avoid big losses????

I think so, sometimes I'd rather get out for around scratch if opportunity presents itself rather than face an annoying uphill battle, and I'll rather wait for market to level out a bit before maybe going back in. If the market wants to give you a much better price then by all means you should probably let it In some cases it would make more sense to reverse my original position but that thought rarely crosses my mind during that trade, only after, because your mind is too busy "managing a bad trade" That's probably something I can work on actually, somehow getting rid of that little bias would make some markets a lot easier.

But my markets last for a while so I get several cracks at them, and I know the ranges on them quite well, so IDK, maybe for prerace you should stick to the more competitive races with smaller ranges. Hard to tell only based on my own trading, but I think if you're doing your averaging right then your occasional bigger loss should be somewhere around your bigger win, and you should have a lot more of those wins than losses. I think I get about 1 losing market per P&L page on average, and it's usually a smaller one, but that's not an accurate assessment of averaging approaches since the results include scalping and other stuff. So your 90% hitrate is not far off probably, so maybe you just have to manage the worst markets better.

I really don't credit myself with knowing stuff after "500 races" simply because of the amount of preparation work I have done. I guess my work has been away from the screen more than on it

One of the best books on Volatility I ever read was by Sheldon Natenberg which you can get online in pdf form for free and its called Options Pricing and Volatility but it takes that leap to juxtapose some of the theory across which I am not entirely sure is the right way to approach this problem but have to start somewhere. If horseracing markets were options, they would have tremendous value because of the key metrics in the Black-Scholes options pricing model is the volatility and the greater the volatility the more intrinsic value is in the option. I have a copy of William Ziemba's book The Efficiency of Racetrack Betting Markets and Ziemba came into horseracing because of its similarity with options markets and especially the time expiry issue.

Where my knowledge is lacking is in fully transposing this stuff onto the horseracing markets. As you said I need to manage the losing positions better and in fact in the process of coming onto the forum, I already had the idea that my "Achilles Heel" is in forcing or trying to force green screens for the same profit margin that I was attempting to achieve during the earlier stages of the market. As a market travels towards its SP (which may be some considerable distance away from my first entry) then the possibility of the price tanking at that level and ranging is very real and I think the best way to manage that possibility is to aim to scratch as soon as possible once more open trades are active and thus exposed to a potential big loss.

I am attempting to address the volatility issue with multiple entries but am undecided whether to ditch this strategy and switch to a conventional stop loss or whether all it needs is tweaking.

[Derek27]

You make an interesting point Derek but am I right in thinking that you are advocating having say a fixed lay liability in your example with your £100 and then instead of a one hit or two hit process you are spreading with entries of say 10-10-10-10-20-20-20 instead of say 40-60??? The problem I have been experiencing is that my plan of several entries that I have spread out over a significant distance has still been struggling in 1-2 races per day on average where the price has simply moved in one direction and never retraced enough to offset the additional spreads and losses. Then the market tanks as it approaches SP and I am looking at a big red. I can't see how in long trending markets that don't retrace how a gentle spread like that can offset a red screen without being aggressive. Another problem with my approach is the scalability of it as aggressively increasing stakes will also hit liquidity problems especially in weaker markets.

Am I missing something or as Peter says, should I just take my losses like a man

I'm not advocating anything, there are a million good ways to trade and organise staking. I'm just saying where you open trades and how much you stake must have firm logic and reasoning. Any strategy that involves adding to a trade with increased stakes when it goes against you, either to recoup losses or any other reason, is highly risky to say the least.

Personally I don't often add to a trade but adding to a trade that's going my way sounds far more appealing to me than doubling down on one that's gone against me.

[Morbius]

Another issue I am realising with regards to increasing stake levels aggressively and placing multiple entries without using stop losses is that I am unsure at this stage how scalable it is. For example starting with say £100 and then placing £200 followed by £400 etc would run into liquidity issues in many markets or it certainly would do if you scaled up your first entry size but this would be far less of an issue if I used a one hit entry and traded conventionally with a stop loss.

I am torn between these two approaches and I know many people on here would say choose the latter in a heartbeat but I can't help but think there is something in the former that I am just not understanding well enough.

[Morbius]

You make an interesting point Derek but am I right in thinking that you are advocating having say a fixed lay liability in your example with your £100 and then instead of a one hit or two hit process you are spreading with entries of say 10-10-10-10-20-20-20 instead of say 40-60??? The problem I have been experiencing is that my plan of several entries that I have spread out over a significant distance has still been struggling in 1-2 races per day on average where the price has simply moved in one direction and never retraced enough to offset the additional spreads and losses. Then the market tanks as it approaches SP and I am looking at a big red. I can't see how in long trending markets that don't retrace how a gentle spread like that can offset a red screen without being aggressive. Another problem with my approach is the scalability of it as aggressively increasing stakes will also hit liquidity problems especially in weaker markets.

Am I missing something or as Peter says, should I just take my losses like a man

I'm not advocating anything, there are a million good ways to trade and organise staking. I'm just saying where you open trades and how much you stake must have firm logic and reasoning. Any strategy that involves adding to a trade with increased stakes when it goes against you, either to recoup losses or any other reason, is highly risky to say the least.

Personally I don't often add to a trade but adding to a trade that's going my way sounds far more appealing to me than doubling down on one that's gone against me.

Thanks Derek, you have basically pinpointed what my dilemma is but what I couldn't get my head around was if this was only risky if it wasn't being executed correctly and I wasn't doing it right. I have got myself into some very tricky situations, many have worked out but several didn't but was unsure if this was just my bad trade management or not. Could I be so bold as to ask you Derek if you have learned through experience not to add to red screen positions?? Because financial traders in many types of securities do not baulk at doing this or in your opinion, is this much more difficult to achieve based on the rapid time decay in the pre-race markets and the fact that the market will eventually range around its SP and this is the ultimate Achilles Heel in such a strategy??

[Kai]

One of the best books on Volatility I ever read was by Sheldon Natenberg which you can get online in pdf form for free and its called Options Pricing and Volatility but it takes that leap to juxtapose some of the theory across which I am not entirely sure is the right way to approach this problem but have to start somewhere. If horseracing markets were options, they would have tremendous value because of the key metrics in the Black-Scholes options pricing model is the volatility and the greater the volatility the more intrinsic value is in the option. I have a copy of William Ziemba's book The Efficiency of Racetrack Betting Markets and Ziemba came into horseracing because of its similarity with options markets and especially the time expiry issue.

Eh, I'm not much of a bookworm, the only thing I sometimes enjoy reading is the markets After all, aren't all those same things written in the markets as well?

But anyway, if your Achilles Heel is a bit of greed then that's pretty normal, we're all greedy bastards by default. I'm pretty decent on the ladder and my edges come from it directly, although now that I think about it I probably average a bit too much but it keeps the variance at bay and makes trading much easier I guess, and it works both ways, if you open yourself up to catch that juicy upside then you have to open yourself up for bigger losses as well, so in the end you're the gets to chose your variance, it's all entirely optional. I know I need more losses on my P&Ls and it's a work in progress.

My biggest weakness or Achilles Heel if you will are value-based approaches (like Psychoff jackpots), don't really have the ability to find value in every match like the big boys but only when it's obvious, since I never punted I never had the opportunity to practice that skill and when I started to trade I was always too much of a purist trader to give it a serious consideration. So I probably perceive value a bit differently, from the ladder perspective mostly, after a while it certainly gets more obvious which prices scream value and which ones don't, so I try to position myself as best as I can.

Overall I do agree with you, a lot of people just run away from volatility but I like to run towards it and I get excited by it, so far I feel that's where some of the best opportunities lie.

[Morbius]

One of the best books on Volatility I ever read was by Sheldon Natenberg which you can get online in pdf form for free and its called Options Pricing and Volatility but it takes that leap to juxtapose some of the theory across which I am not entirely sure is the right way to approach this problem but have to start somewhere. If horseracing markets were options, they would have tremendous value because of the key metrics in the Black-Scholes options pricing model is the volatility and the greater the volatility the more intrinsic value is in the option. I have a copy of William Ziemba's book The Efficiency of Racetrack Betting Markets and Ziemba came into horseracing because of its similarity with options markets and especially the time expiry issue.

Eh, I'm not much of a bookworm, the only thing I sometimes enjoy reading is the markets After all, aren't all those same things written in the markets as well?

But anyway, if your Achilles Heel is a bit of greed then that's pretty normal, we're all greedy bastards by default. I'm pretty decent on the ladder and my edges come from it directly, although now that I think about it I probably average a bit too much but it keeps the variance at bay and makes trading much easier I guess, and it works both ways, if you open yourself up to catch that juicy upside then you have to open yourself up for bigger losses as well, so in the end you're the gets to chose your variance, it's all entirely optional. I know I need more losses on my P&Ls and it's a work in progress.

My biggest weakness or Achilles Heel if you will are value-based approaches (like Psychoff jackpots), don't really have the ability to find value in every match like the big boys but only when it's obvious, since I never punted I never had the opportunity to practice that skill and when I started to trade I was always too much of a purist trader to give it a serious consideration. So I probably perceive value a bit differently, from the ladder perspective mostly, after a while it certainly gets more obvious which prices scream value and which ones don't, so I try to position myself as best as I can.

Overall I do agree with you, a lot of people just run away from volatility but I like to run towards it and I get excited by it, so far I feel that's where some of the best opportunities lie.

Running towards volatility as you call it is the only way IMHO. The markets because of their liquidity issues are incredibly volatile for that reason but this in my mind makes the horse racing markets profitable or potentially so for someone like me who isn't doing it yet. The key I think is in the nuances of that volatility in horseracing markets compared to financial markets and learning to handle the differences.

In terms of "value"...I think we all look at value differently. I have a long horseracing background from a punting perspective and studied it for years. So my original concepts of value probably held me back because the exchanges increased the efficiency of the markets and it takes someone with knowledge that I don't possess to know than a 3/1 shot should be 5/2. But to a trader value is seen differently and especially when it comes to volatility and whether the horseracing markets are primarily structured for traders to sell or buy volatility.

I know Peter remarked in one of his videos how he essentially sold volatility which is a tough concept to get your head around until you get a grip on the theory which it took me a while to do. But if you are making money over time then you are finding value in the market which cannot be argued against but value is subjective I think and has a habit of allowing us to see mirages