Defining risk - what does it mean to you?
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An idea I first heard from Mark Douglas, interested to hear people's perspectives on if/how they define risk. Before each session? Before each trade? Is it in financial terms? Mindset terms?
Here’s my stab:
Risk is the probability and associated cost of something not turning out to be what you expect (or want) it to be.
Every decision you make in life has risk. You would generally expect a high reward to compensate you for taking a high risk. Doing well at trading or gambling requires you to be good (accurate) at estimating risk such that you can make choices where the reward more than justifies the risk in the long run.
Edit: For example, imagine you are bad at estimating risk. You will either miss opportunities where the risk was worth the reward because you miscalculated the risk to be higher than it was. Or alternatively you will pick bad choices where the risk was greater than the reward by miscalculating the risk as being lower than it was.
Obviously it can be more complicated than that if there are many factors and/or subjective factors involved. The correct decision for one person might not be the same for another. Plus the decision you make will depend on how well you handle higher levels of risk (potentially regardless of how high a reward).
Risk is the probability and associated cost of something not turning out to be what you expect (or want) it to be.
Every decision you make in life has risk. You would generally expect a high reward to compensate you for taking a high risk. Doing well at trading or gambling requires you to be good (accurate) at estimating risk such that you can make choices where the reward more than justifies the risk in the long run.
Edit: For example, imagine you are bad at estimating risk. You will either miss opportunities where the risk was worth the reward because you miscalculated the risk to be higher than it was. Or alternatively you will pick bad choices where the risk was greater than the reward by miscalculating the risk as being lower than it was.
Obviously it can be more complicated than that if there are many factors and/or subjective factors involved. The correct decision for one person might not be the same for another. Plus the decision you make will depend on how well you handle higher levels of risk (potentially regardless of how high a reward).
Last edited by xitian on Sun Nov 19, 2017 2:30 pm, edited 1 time in total.
Risk is largely the percentage of your bankroll that you're exposing. Exposing 1% isn't risky, exposing 90% is, even if the true probability of winning is 99%. The probability of losing is of course a factor and can increase the risk.
I guess being a good risk taker could be described as being good at estimating those known unknowns and minimalising those unknown unknowns. Question is, how can you know how many unknown unknowns there are!Euler wrote: ↑Sun Nov 19, 2017 2:26 pmI've never topped this explanation: -
https://www.youtube.com/watch?v=GiPe1OiKQuk
That's the same as saying the chances of losing !
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When I first saw that press conference I was sitting in a bar trying to figure out why the Secretary of Defense was talking about gnomes... I'd obviously had a few at that point!Euler wrote: ↑Sun Nov 19, 2017 2:26 pmI've never topped this explanation: -
https://www.youtube.com/watch?v=GiPe1OiKQuk
I like the way the reporters started laughing as soon as he mentioned "unknown unknowns", as they realised that he doesn't know.Euler wrote: ↑Sun Nov 19, 2017 2:26 pmI've never topped this explanation: -
https://www.youtube.com/watch?v=GiPe1OiKQuk
If the video was extrapolated to horse racing, would the following be along the right lines? ThanksEuler wrote: ↑Sun Nov 19, 2017 2:26 pmI've never topped this explanation: -
https://www.youtube.com/watch?v=GiPe1OiKQuk
"The 2nd is drifting":- Known known
"The 3rd is stable":- Known unknown
"The bomber":- Unknown unknown
"The 3rd is stable (scalper)":- Known known
"The 3rd is stable (swinger)":- Known unknown
"The 2nd is drifting, I will lay":- Known known
"The 2nd is drifting, I will back":- Known unknown
Quickly get pretty complex, especially the last example. Because which trader is correct?