Further to my previous post about strike rates, I thought I add some flesh to the discussion.
At the end of the day people have a variety of different risk profiles. Your tolerance and reaction to risk is predominantly a psychological factor. The good thing is you can learn to overcome any psychological failings. When I was not as experienced as I am now I would often over analyse things and let the market be my master. Now I am much more relaxed and can feel quite comfortable committing large amounts of money to the market. That’s because I know what my maximum loss is and work around that variable.
Some people trade in a manner where they aim to reduce losses and ride up any profit they see. While others take high risk and hope / work hard to ensure that things even out. The most important thing is to keep the two in balance.
Different markets throw off different characteristics as well. If you do pre-off horse racing then your profits are limited, but so are your losses. The only way you can completely do your nuts if you turn your trade into a bet. So therefore, you can conclude, your maximum loss is definitely limited. If that’s the case it’s all about minimising this potential for loss. If you assume the markets could move in either direction from the point your enter, then you know profit exists and you will get some, you just need to minimise the cost of it.
As you go into an in-play market your potential loss increases. You could face the prospect of a total loss of your stake, so your focus shifts to maximising your potential profit. If you have backed a Football team to score first and the opposite happens, you will lose most of your stake. If you wait for an equaliser, you could still lose the same depending on when the goal is scored. If they re-take then lead then you will quids in!
Shift to Tennis and profit can be achieved in a beautifully subtle way. Close fought competitive matches mean you have many chances to minimise any errors as the price will most likely flip flop over your entry point, unless you have picked a stinker of an entry point. If you look at the US Open and backed or laid Murray at the start then your decision making process would have meant you could have the opportunity to cut for no losses at 10, 18, 25, 55, 60, 64, 70 & 90 minutes. That doesn’t really tell the whole story of this match either. It was a great trading match.
For a comparison, have a look at the following images. You can see I really couldn’t be bothered with the evening! This is UK Racing only and excludes other sports. I think people imagine that you get big losses and profits but pre-off racing generally doesn’t produce that unless you let it get completely out of control. On Saturday I made £2.6k on the pre-off racing. I made six losses and biggest loss was £55, that’s about right. At worst you should get small profits and small losses, netting each other out. That is exactly what happens if you trade at random. To get off random you pick better entry points and minimise losses. For years what I have been trying to do is increase the average profit but reduce the standard deviation. In layman’s terms, make more at lower risk. But you have to take some risk and that varies depending on what you are doing.
The second P&L, which is not mine I should add, shows an impressive result but a very different risk profile. Big wins and big losses. Biggest loss was over £1k. Today that strategy may make a loss, but it would have to be a large one to overturn the prior days profits and the two will balance out over time. It achieves the same objective but with a vastly different profile. You should be able to judge how this was achieved.
So your objective is more or less the same, make more than you lose - that’s obvious. But there are just so many ways to do it! That’s while whenever I do a talk I always open with money management and understanding risk. It’s such an important thing to guide you when you are trying to understand exactly what your objective is or how to correct errors. The answer however is a very personal thing.
Category: Trading strategies