Risk management and odds

Discussion in 'Risk Management' started by NKNY, Jun 13, 2001.

  1. NKNY


    I am posting this e-mail I received from LBR Group for educational purposes.

    It simply reiterates something that took me almost 9 years to understand. There is no holy grail to trading. No system that the "pros" use . There is no big secret way of trading that is right all the time. Once you truly unerstand and actully believe this .....and actually stop searching for it you are on your way to at least surviving.

    The true "Holy Grail" is called Risk management, position sizing and consistincy in using a trading technique that you are comfrotable with.

    Just my thoughts.....Nick


    While some people question how easy it is to make a
    consistent living TRADING, how about making a consistent,
    comfortable living betting on horse races? Here is a story
    about Ernest Dahlman - someone who has experienced amazing
    success at betting on horses for the past 35 years. Some of
    the principles that have contributed to E.D.'s success are
    the very same applied by top, professional traders. The
    following includes excerpts from a June 3, 2001 article
    titled THE WIZARD OF ODDS, published by the New York Times
    and written by William Grimes. We recommend that before you
    read our story you read the original article in its
    entirety. It is necessary to register first on the NY times
    website. They will have the article freely available only
    until June 10. Go to the following link:

    This Wizard of Odds, "Ernest Dahlman, may be the world's
    most successful horse bettor. The reason he's so good is
    that he doesn't gamble." But, according the article, "in
    a busy year, Dahlman might bet as much as $18 million."
    Let's look at some of the main principles that contribute
    to Dahlman's success and see how they are transferable to

    1) Dahlman narrows his playing field. He specializes
    primarily "with races at tracks in New York and California"
    where he perceives himself to have a larger edge. This way,
    he can become familiar with the subtle nuances such as local
    trainers (in whose hands a horse can experience a "religious
    conversion") and track conditions. A trader will do best
    to concentrate on a select "stable" of markets and learn
    their individual personalities, than to jump into markets or
    individual stocks that have not been thoroughly researched.

    2) Dahlman specializes in a very specific type of bet - the
    exacta, his "bread and butter." A trader will do best if he
    specializes in just one style or pattern or trading
    methodology. Know the risk/reward characteristics of your
    individual technique. Dahlman chooses what would at first
    glance appear to be a high risk technique, but one which
    offers good rewards.

    3) Dahlman pays more money to minimize his risk. He hedges
    his bet by creating a box ("twice as expensive as a straight
    exacta" but which "lets Dahlman have things both ways").
    Successful top traders are far more interested in strategies
    by which to minimize risk than those that go for the big
    gains. Stops, protective options, or spread strategies are
    just some of the ways to minimize risk.

    4) Be a "plodder," a nickel and dimer. "On average,
    (Dahlman) says, he earns 3 or 4 percent on his investment."
    He never bets serious money on long odds. Stick with the
    high probability setups. Don't try to hit home runs. "The
    point is, there's no such thing as a sure thing. Favorites
    win only a third of the time, an immutable racing statistic.
    Even successful bettors tear up more tickets than they cash.
    The trick is to cash enough tickets, at the right odds, to
    offset the losses and turn a profit. That's where addition
    and subtraction come in."

    5) Know the seasonalities of your game. "'Winter is my
    favorite time of year,' he said cheerfully. 'It's more
    predictable. The horses tend to be older, and you know what
    they're going to do. And out in Northern California it
    rains, and you get a lot of grass races switched to the
    main track, resulting in complete mismatches.'" If you
    are a grain trader, there are distinct times of year when
    volatility increases. If you trade options, there has
    historically been a strong tendency for volatility to
    contract going into the summer - good if you are a short
    premium player, bad if your game favors a momentum style.
    Do you do best at the beginning of the year or the end of
    the year? Know the cycles in both your game and yourself.

    6) Do your daily homework. "Most horseplayers love a
    contentious 12-horse race with the promise of three-figure
    exactas and monster trifectas. Not Dahlman. 'Anyone who
    knows anything about gambling will tell you I'm not a great
    gambler,' he says. 'What I'm good at is arithmetic. I can
    add and subtract.'" "Like many other professional
    horseplayers, Dahlman relies in part on the work of others.
    The Daily Racing Form gives him a compressed description of
    the last dozen races run by each horse entered in a race.
    That merits a quick glance. The more serious numbers come
    from 'the sheet'" ... which analyze and quantify... "a
    variety of factors, ranging from track resiliency to wind
    direction to the distance actually traveled by each horse."
    He considers his detailed record keeping to be his biggest
    edge. What type of detailed record keeping do you maintain
    with your own trading?

    7) Specialize, Specialize, Specialize! Who would have ever
    thought of specializing in Dahlman's "overriding
    preoccupation, horseshoes? Years ago, Dahlman began
    noticing something funny about horses equipped with mud
    calks, cleats that some trainers use for extra traction when
    rain turns dirt into mud. Dahlman noted that even when rain
    failed to materialize, a lot of horses seemed to improve
    several lengths when wearing mud calks for the first time"
    It's also another "reason he loves Golden Gate Fields,
    near San Francisco. It rains a lot there, so plenty of
    mediocre-seeming horses are switching to mud calks for
    the first time and then sneaking into exactas at good
    prices. A second reason for loving Golden Gate is that
    the track posts very detailed shoe information before
    each race." Find your niche!

    8) Believe in your own game and don't listen to anyone
    else! Although "Dahlman accepts as highly accurate ...
    the raw speed numbers," he rejects "other assumptions
    in the sheets." Others dismiss Dahlman's horseshoe
    theory. It does not matter who thinks your style is right
    or wrong ... all that matters is that you believe in it
    yourself and follow it consistently.

    9) Keep your losses at the sleeping level. In the best
    quote from the article, "If I keep my losses at $7,000, I
    can sleep easily," Dahlman says. "I can get that back
    in one race." Your sleeping level may be different
    from anyone else's.

    Here is a person who has managed to keep a balanced
    life and raise 6 children while still maintaining his
    passion for the horse racing. As the game changed,
    from trotters to thoroughbreds, he was able to adapt with
    the times. We have seen many games come and go in
    the markets, from equity options arbitrage to the
    disappearance of SOES traders. We have seen markets
    change from a momentum environment to a trading-range
    game. A trader must specialize in one thing yet be ready
    to recognize when it is time to learn a brand new game.
    Recognize that Dahlman built up a lifetime of racing
    knowledge. He relies on that experience to interpret the
    incredible amount of information he gathers. For newer
    traders just learning to make their way in this business,
    recognize that, ultimately, experience is the best teacher.
    Every day that you trade, you gain experience. Keep the
    discipline, keep the faith. To repeat one last quote:
    "It's an art with just enough science to make it possible
    for a very tiny percentage of bettors to take money away
    from the herd of less disciplined bettors."

    Trading? or betting the horses?

    Best Wishes,

    Linda Raschke
    LBRGroup, Inc.

    P.S. You are receiving this message because at one time or
    another your e-mail address was registered in the LBR
    guestbook. If you wish to be removed, simply reply to this
    message with REMOVE in the subject line.
  2. mgregor


    That's a very interesting article indeed! It just shows that sometimes, NOT following conventional wisdom can prove very profitable.

    And it also proves that the most important element in any trading strategy is risk management.
  3. I live across the street from the beach and Horse Race track in Del Mar.

    I personally don't like the odds in horse racing. The track takes over 30% out on the bets. The's a considerable spread.

  4. vvv


    thx for sharing that highly interesting article with us.

    just goes to show that if you manage to identify what the truely relevant factors in achieving success in a chosen field are vs all the irrelevant noise and combine that with strict discipline you can make it in pretty much any endeavour.

    identifying the 20% input that lead to 80% of results is probably the first initial hurdle that most will never manage to overcome.

    for those that got that far, the second hurdle is probably learning to keep ones emotions in check.

    but for the very few that achieve both, lot's becomes possible.

  5. Add to this should be mentioned "frequency of bets"
    most pro horse players may bet once a months or a week.
    Being very few pros who are actually money making pros no-one knows the best pros number of bets in a year. I could vary of course. In Vegas I saw an interview with the top sports bettor, and he may take 2-3 large bets a year. Of couse he may "gamble" small in-between. When they bet they swing a big stick but they chose the time very carefully. This also can apply to futures and stock trading. The vig will eat you alive !!!!!
  6. vvv


    i agree that less is more.

    at least if your objective is maximising capital growth then trades with longer term holding periods, accordingly meaning less no. of trades/year, is the only way to go.


  7. Andras,
    I think you are getting carried away with the vig. Sure in illiquid markets it will kill you, but take the e-mini S&P for example. I trade this product a lot and rarely get any slippage. I will buy the bid and sell the offer, sometimes go to market (and hardly ever pay more than 0.25 pts over or under last). With $6 round turn brokerage, the vig is not even a consideration for me. There are many other products just as good.
  8. zentrader,
    Maybe so but I have read "Niederhoffer's" book and it reads
    like a doctoral thesis. True he has blown out of the market
    but I value his analytical skills and stat knowlege as
    much as the next guy's.I suggest you take a peek. His
    analisys is - the vig is very high on the list of reasons for failure. (read overtrading) I have seen this everywhere
    besides him. I am sure your broker will disagree ;)
  9. Cesko


    These are the words of Linda B. Raschke (as you know she is not a broker):"I think nowadays the media uses the word day trader to refer specifically to those people who never carry trades home overnight, or intra-day traders. Most recently the term seems to be used a lot with upstairs bucket shops, if you will, those little electronic day-trading shops. IN REALITY THOUGH, ALL PROFESIONAL TRADERS THAT I KNOW, INCL. LARGE CPA's THAT MANAGE BILLIONS OF DOLLARS, DAY TRADE. I don't think people recognize the fact that average holding period per trade for 90% ofthe pros out there is extremely short.. An overwhelming majority of pros tend to do majority of their trades on an intra-day basis. If you are successful pro trader, the odds are that you will be trading on a very short-term time trade. SWING TRADING IS THE LEAST RISKY TYPE OF TRADING YOU CAN DO BECAUSE YOU ARE NOT TRYING TO MAKE LONG TERM FORECASTS OR PREDICTION.
    In my words, as number of trials increases (in any game) factor of luck gradually diminishes. Large # of trials works in your favor. Second, you have more control(day-trading). The only actor working against are ,of course, commisions. Psychologically day trading is more intensive endeavor than investing. Mainly because of cutting losses. The reason anybody who loses a fortune in day-trading is not because of the odds, but because he is clueless.
    Andrasnm this is not supposed to be anything personal but following your comments at this message board you are easily the most negative person around here. I wonder whether you are aware of it.
  10. vvv



    the large majority of successful buy side players do not daytrade...

    i'm not talking about a smalltime exchange member, but the big hedge funds and CTA's...

    75% of CTA's are long term trend followers...

    Robertson and Soros very rarely traded intraday.

    of course on the sell side, dealers (specialist and market makers) only trade intraday.

    #10     Jun 14, 2001