Punt.com - A Blog About Gambling by a Professional Gambler.

Future blindness, Historical narratives.

I've been thinking about making this post for some time now, I've been very interested in recent months in the subject of how poorly we humans are at figuring out the consequences of our actions.  Particularly actions that we've made before, and continue to make, often with similar results. 

These results can be negative or positive, and there can be more than one consequence.  For example, you forget to put the rubbish out on a Wednesday evening, not only do they not pick it up on Thursday morning, but Mrs. Punt is less than impressed!  Perhaps a better example; you didn't get out of that trade when sentiment turned, now you feel stuck on an outcome which is drifting in price and appealing more to your value hunting, punter mentality, rather than the trader's mentality you entered the trade with (more on this example later).

The title of this post might be better phrased as, learning from your mistakes.  But I'm not sure it's quite that simple.  We certainly don't appear to learn as efficiently as we should, so I'm more interested in why, what's stopping us, and how can we make our best efforts to avoid errors or allow for consequences.

Those of you who have read The Black Swan, will recognise the phrases I have used in my title.  He talks a lot about our in ability to think forward, we are "future blind".  I refer you to the Black Swan Glossary, "Future blindness: our natural inability to take into account the properties of the future –like autism which prevents one from taking into account the existence of the minds of others." 

Not only this, it is apparent that we are excellent at adding narratives to the decisions we made in the past.  We try to give reasons why we did certain things, or didn't spot things or certain things happened... We suffer from the narative fallacy, "our need to fit a story or pattern to a series of connected or disconnected facts,"  how can we do this when we weren't even attempting to think ahead?

We wander through life making decisions, on the spot.  Faced with a set of variables, we take a certain direction, we don't generally think of the set of variables this new direction will offer up, and importantly - how likely some of these 'variables' are to crop up and further affect the time line.  Variables can appear in infinite guises, mental, physical, internal, external, out of your control and (if you are lucky) under your control.  In life the distribution of these consequences is random and extreme.  In sports trading - we have a random, extreme sport, and a slightly more mediocre and predictable marketplace to provide an interesting 2 fold puzzle.

Lets make this simple, if you are a trader, your job is to manage exposure to these variables and consequences (and associated probabilities) as best you can.  Why?  Because it is these that decide where you get in and where you get out of your trade.  If you don't make an attempt to quantify consequences, then you are not attempting to figure out your risk and reward, and the probabilities contained within.

I'm not saying you can be precise with your measurement of these consequences, no one knows the true 'value' of things, particularly in the more extreme random part of the equation - the sport you are trading and the participants in the marketplace.  The important thing to take away from this is 'the attempt'.  Merely trying to look for outcomes, both of your own actions and the action taking place in the sport (and their probability) is good enough to provide a framework of learning and future decision making.  Without this, you are confined to providing a best fit narrative, after the event... essentially, you are making up history!  (One has to wonder just how much "history" is actually made up, out of a need to add a narrative to fit what was a random situation.)

And how easy it is to start narrating..  Hindsight is a wonderful thing!  When we know what happened, it is almost always easier to see this outcome as obvious and of a much higher probability than it actually had at the time.  I refer you to Taleb's reverse engineering problem, "It is easier to predict how an ice cube would melt into a puddle than, looking at a puddle, to guess the shape of the ice cube that may have caused it. This makes narrative disciplines and accounts (such as histories) suspicious."

Let's go back to our examples above.  I was going to leave out Mrs. Punt, but then I thought it's quite a good example of how random things can be.  Here is a real life situation with an infinite number of positions and outcomes - an ice cube that could quite literally be any shape.  What caused me to not put the rubbish ('trash' for our American visitors) out?  What distracted me?  What mood was Mrs. Punt in when she came home, what caused that?  How likely was it that she would be in a good mood and not care (much) about the rubbish?  If we didn't realise how random life was, one thing we did know about was the randomness of female emotions!   Perhaps we should swiftly move on to our trading example..

Here we have a classic example of not attempting to think ahead.  I've hinted above that it's important to think of outcomes internally and externally.  Resulting actions of consequences occur on two levels, what happens in the World, and how we react, it's important to try to weigh up the probabilities of both and how they relate to one another, not straight forward, but very worthwhile. 

In our example, what was the probability of our trader changing his mindset to fit the situation?  To figure this out you need to know what situations cause the change, which of these can be altered by a change of strategy and which are vulnerable to the randomness of the market and the event it's based on.   

Obviously there are questions about why they felt the need to change... we'll not concern ourselves with those.  The bigger picture here, is that an attempt by the trader to put a probability on this happening - by assessing the situation constantly, is what will help prevent it occuring, by allowing them to manage their position well enough to minimise it's chance, presuming that they actually find this course of action to be negative...

Which of course, it is.  Changing the term (time scale) of your strategy mid-trade can very occasionally be suitable, but the rest of the time it is back-fitting at it's worst.  You are providing a new narrative to what is occuring to suit some poor trading decisions.  Which is why your assessment of the situation needs to be constant. 

Paul Tudor Jones in his interview in the Market Wizards book said that it didn't matter what price he was long or short from, all that mattered was what the risk / reward was right now, and whether that meant he should be a bull or a bear.  If it agreed with his position then he held it, if not then he closed or went the other way.

A recap.. How can we do our best to avoid future blindness, and our tendency to add narratives,

• Assess the situation on a constant basis, question various scenarios and their probabilities and always keep in mind that the scale of these can vary to an extreme and unpredictable degree.  Nothing is impossible, and many things you think are very low probability are very capable of happening.
• Assessments of event probabilities have a second layer of effect on the market, assess the way the market could react to these and use this to form an idea of risk and reward.  The market is what allows you in and out of trades.
• Remain skeptical about stuff that happened in the past, don't automatically assign a narrative that suits how your trading turned out... once upon a time, this was randomly decided.
• Don't add your own narrative to current events either, this will skew your assessments (avoid matches you think are fixed for example!).
• Keep a record of your attempts at guessing the risk and rewards for various scenarios.  You will only ever see one side of this guess resolved, the other side forms the risk or reward, and is of equal importance for your profitability.
• Constant reassessment takes a lot of mental energy, but gets easier with practice... it can become a habit / instinctual.
• Next time you are making a fast decision, base it on a honed assessment of what might happen and the risk/reward.  If you have time, stop and consider the results of what you are doing, because it's apparent not many of us do this often enough! 
• An important part of not making the same mistake again is looking for it ahead of time, the same goes for any new mistake.

I went through a long period in the last year of not getting anywhere.  When I did my analysis 3/4 months ago, it became very obvious I had simply been repeating the same strategic mistakes over and over again in cycles.  To put a stop to them, you have to first notice them and figure out why you made them, then begin to think ahead.  I realised that I was making the same errors simply because I wasn't watching out for them ahead of time, before long I would find myself in the same corner again, going through the same costly consequence.  I also found I was adding a narrative on the match I was trading rather than looking at what I was doing personally, as well as how the market had been moving. 

Hopefully now you will keep a watch out for the mistakes that I made in your own situations.  Keep your eyes peeled, and get 'back to the future'..  That is essentially what we are trading - 'the future', the future movements of markets and their related probabilities.

All money is created equal.

You may not have realised, but we all have a tendency to value money differently in certain situations.  Let me begin with a story, this one does the rounds in Las Vegas, judging by the amounts of money involved I do have my doubts about the truth in it, but it does illustrate perfectly one of a few psychological problems we have with money, and it's in a gambling context, even better!  It's called, "the legend of the man in the green bathrobe".

"By the third day of their honeymoon in Las Vegas the newlyweds had lost their $1,000 gambling allowance. That night the groom noticed a glowing object on the dresser. Upon closer inspection he realised it was a $5 chip they had saved as a souvenir. The number 17 was flashing on the chip’s face. Taking this as an omen, he put on his green bathrobe and rushed down to the roulette table where, not surprisingly, he bet on number 17. He let his winnings ride and eventually he was worth $7.5 million. Unfortunately the floor manager intervened, claiming the casino didn’t have the money to pay should 17 win again. Not to be deterred, the groom caught a taxi to another casino where he bet all on 17 again, when it hit it was worth $262 million. Needless to say, with such luck he bet again, only to lose it all when the ball fell on 18. Broke and dejected, the groom walked the several miles back to his hotel. ‘Where were you?’ asked his wife. ‘Playing roulette!’ he replied. ‘How did you do?’ ‘Not bad, I lost $5.’ "

This had me laughing when I read it, but then I realised this is exactly the sort of mind set that affects some people, particularly gamblers.  Admitedly, no one in their right mind is going to bet $7.5m on 17, let alone $262m!  But the point about how he felt he only lost $5 is perfectly apt.

Another illustrative scenario is one where you have two items to buy, one is worth £50, and the other is worth £2000.  In both cases, you arrive at a store selling these items to find that they are priced at £75 and £2025, but there are locations 5 minutes drive away which have them at the correct price.  Almost everyone would decide to drive 5 minutes to save £25 on the £50 item, a much smaller percentage would do so for the £2000 item.  Yet both £25 savings are equated to a 5 minute drive.

Finally one more scene for you, imagine there is an item you've wanted for a very long time, but it's not quite been easily affordable.  Let's say this item is £500, and you've seen a deal for one priced at £470.  Later on, you are investing in a very big lifestyle purchase, perhaps a car or some expensive equipment, the cost for this is £15000.  The dealer selling you this, then takes the opportunity to offer you the item you really wanted earlier as an add-on for an extra £600.  Suddenly this doesn't seem like such an expense, you are already spending £15k, you take the opportunity to get something you've wanted for ages whist spending the money, "what's an extra £600 on the top of £15k?".

Each scenario slightly different in psychology, they all have particularly wide ranging importance when looking at how we manage and save our money generally, but they are also brilliantly applicable to gambling and trading.  Lets deal with the last one, first. 

The first thing that struck me was how easy it is to view money as cheaper the more you spend, and how often I have been affected by it.  I have to wonder how often others are struck down by this mentality too.  Clearly when we think of this scenario in a gambling context, we are talking about adding to losses, or averaging down a losing position by making the bet even bigger, because we see it as cheap. 

It became obvious to me that this is one of the reasons a lot of people go bust or never get anywhere.  In fact, the three scenarios together form a big part of whether you will win, win for a while then give it back, or go bust.

If you are losing whilst trading, it's very easy at times to convince yourself to add to your position - if you are already losing £10k, what's another £1000 ?  The answer of course is £1000!  And that's a lot of money.  It's also money that you will potentially have to work many hours to make back.  The more hours you work making back 'throw away money', the more pressure it places on you.  It defeats many people in the long run.  Before you know it, you are simply treading water / money, and that's if you are lucky enough to be fairly strong willed.

Don't add to losing positions.  Just because you are losing money, it doesn't make losing more money any cheaper, all money is equal and it's all work.  Cut your losing positions, save yourself hours more work, heartache and money.

Lets go back to the man in the green bathrobe.  They call this the mentality of playing with 'house money'.  Mentally you consider it the casino's money rather than your own, because you 'won' it rather than earned it.  In other words, it's not real money.  ...It's always real money.

This is a classic example of how people who do well for a while, give it all back many times faster than they made it.  All the while justifying their actions by telling themselves that they were 'just playing with the profits', 'it wasn't really my money', 'I started with £100, I still haven't lost that, so I haven't lost anything'...  what about the £5,000 you just lost then? 

You put this in writing and it looks crazy, but this happens all the time in gambling and trading circles.  The forums are littered with stories of 'giving it all back' etc.

Finally, lets look at our second scenario.  The one where the amount of effort is worth the same amount of money, but is disguised by the amounts being spent.  You have to think and act efficiently to make gambling / trading pay.  That tick you gave up in order to get matched, that cost you.  That time you crossed the spread, took someone else's offer, that can cost you on many levels in the long run. 

I've recently done a lot of work on analysing my activities for the last 15 months.  Betfair were kind enough to send me through a detailed spreadsheet with all the matches that I had traded on in that time, my profits and losses and traded volumes etc.  The sheer scale of what I had done was quite a surprise, even to me.  1066 matches traded and matched volumes of many £10m's, seeing figures like these made me realise many things,

• My edge during that time was a tiny %.
• This was the sum of all my actions, good and bad, during many hours of work.
• Because of the sums traded, a very small improvement in my actions could result in a massive leap in the amount I could win.
• The efficiency of my actions was incredibly important over long periods of time.
• Every £ is equal !  I needed to value all money.
• All the times where there had been 'throw away money', I had spent days and weeks making it back, had I not thrown it away, the profit column might look very different.

How do you avoid these psychological traps?  Three ideas for three scenes. 

1. Avoid the 'house money' mentality, by keeping physical/electronic records of your activity.  Avoid accounting for things in your head, if it's in your head alone it is very easy to write off as not being real.  This will also help you analyse your actions over longer periods of time.
2. Withdraw your winnings.  Don't keep them in your online accounts, whilst they are there it is much easier to see them as just that - "winnings".  It becomes tempting to mentally reassign this money as just profits and not really yours.  Take the money back to a designated amount every so often.  I know people that do this every day, it's a good idea.
3. Cut losing trades, don't add to them.  Set your limits on size, don't go over them.  Evaluate each opportunity and trade them as efficiently as you can - get as many ticks as you can, ask for prices rather than take them.  Every action you make over the course of a year makes a difference to your bottom line.  Value every £ that you play with as real.

"Chance favours the prepared".

I love this quote from Louis Pasteur, "In the field of observation chance favours the prepared mind".  I'm probably going to take this out of it's context, but I think the sentiment applies in many ways to trading and gambling.

I've been reading a fantastic book lately called "The Black Swan", by Nassim Taleb (links to be added later).  A man rather a lot cleverer than I, with a clarity of thought on the subjects of randomness and prediction which is superior to most.  I won't turn this into a book review, but I recommend everyone read it, the humour might not be to everyones taste, particularly the French, but it's extremely worthwhile.

Central to his theme is our inability to predict.  Especially things which are extreme or unimaginable to us.  It left me with a very healthy respect for randomness and much less respect for 'opinion'.  I was a big fan of his previous book too, (link on the left side of the page half way down) "Fooled By Randomness".  Taleb's background is in options trading, he specialised in setting up positions which exposed him to randomness well beyond the expectation of the market.  The payoff for which was vastly beyond what anyone could imagine the probability of it's occurance was.   Simply because it was unimaginable, the bets he was making were of fantastic value.

This was a new idea to me, a sort of 'exposure to randomness'.  Getting the unexpected, 'onside', in a cheap or even free way, that would pay large dividends if these unexpected events ever occured.  Conversly, the people trading in the opposite direction had no clue to the downside of their options and bets.  These were people who focused on small, repeatable profits (read short odds) which crucially, were "expected" to happen.  The lesson, never expect anything!  Especially profits.

Back to the quote.  He is not talking about taking your chances, or predicting your chances, or spotting a chance and predicting whether it will happen or not.  It's about being exposed to chance in the right way.  There is no expectation or prediction involved here.  Prepare yourself / your position so that chance's happenings pay off with the most reward. 

Taleb says, "you do not look for something particular every morning but work hard to let contingency enter your working life".  This is wonderful advice. 

On a practical level, I've been doing a lot of work on my trading to do with this.  Specifically the realisation that I am reliant on the market to allow me out of a position, really I've not been giving enough priority to this... I hesitate to use the word respect in this instance, having read The Black Swan, I'm fairly convinced the market as a whole underestimates many unexpected things.  What I am talking about is the fact that if I am to trade out of a position, then it is the market's position that allows me to do so, not me somehow bulldozing through it or willing it to get to a certain level before I can close.

How does this tie in ?  Basically I am allowing market contingency to enter my trading.  I'm exposed to the unexpected and thus, ultimately - panic and over-reaction.  My reward is greater than it should be, the risk (downside) is minimal.  These are the best trades you can have.

A lot of people use the term 'free lay', a bet with no downside and all upside should the unexpected happen.  Taleb calls these, "free lottery tickets" and suggests we collect as many of these as we can.  He's right you know. 

Most of all, look for situations where the unexpected will hurt you, and ones where it will reward you.  Minimise the former and expose yourself in as cheap a way possible to the later.

January roundup.

Well, I did say once a month didnt I...

The Tennis..

We started the year in Qatar, it's always good to catch as much early action as you can before the Aussie Open, or indeed the rest of the year and there were a few notable points that came out of this one (all my opinions of course).  Firstly, Ivan Ljubicic looked out of sorts, looked slow and inaccurate, based his entire game on his serve - nothing unusual there, just more so than normal. He'll need to sort himself out to stay somewhere near the top of the game..

Andy Murray won the tournament, but more than just playing great tennis, he was also looking considerably leaner and fitter than I've ever seen him.  Clearly putting on some muscle and losing any shred of fat he had last year...  his speed around the court was unbelievable at times.

The Aussie Open was fantastic this year.  Loads of great matches, even on the first day which is usually awash with one sided, boring matches.  Plenty of matches went the distance, it was great trading and surprisingly - good liquidity too during the night, very happy to see that.

Murray will be gutted he went out first round to Tsonga, I'm sure he fancied a very good run after Qatar.  Tsonga was unreal however, we all know that if he hits it inside the lines, he's fairly unstoppable..  huge forehand, big serve.. anyone who watched him go close to beating Roddick in the first round of the Aussie's the year before knew what he could do.  A breath of fresh air.

Fed looked slow and out of sorts, I'm a Fed fan, so I'm hoping it's just a result of his pre tournament illness and not the beginnings of a decline..   

Roddick had a huge match with Kohlschreiber which went deep into the 5th.  Personally I felt he had little game in that match and lent on his serve to get him out of all sorts of trouble..  the match stats suggest a very high quality battle, my opinion is they flattered Roddick hugely, the winners were coming from the German's racquet, Roddick simply far too passive.. no attacking intent from his ground strokes.  Massive improvement needed from him in this area otherwise I see him doing nothing this year.

Nadal looked pretty sharp, not something I was fully expecting given something of a flat finish to last year.  He looks ready to go, but was beating by a man playing out of his brains.

We haven't mentioned the winner yet, Djokovic.  I think a fair winner in the end, his level was above that of Tsonga in the final...  most noteworthy point on the Serb..  backhand down the line!  where has that come from ?! 

On the Womens side, although I dislike Maria, it was good ot see her come back and play perhaps the best she's ever played..  makes this year very interesting, with pressure back on Justine Henin now who was head and shoulders above everyone last year.  Maria's got herself a new set of wheels to get around the court it seems.  Gone is the heavy goods vehicle reverse beep..  impressive change in her movement, credit to her fitness coach, she was getting balls back that previously she had no hope of getting close to.

Wierdest match of the tournament, Serena Williams v Jankovic.  What the hell went on here ?!  Serena was playing some reasonable tennis before this, and Jankovic could barely run with all the injuries she has been accumulating recently.  Williams looked in pieces on court, serving at 75mph, hitting 25 backhands into the net and moved like the Sharapova of old.  She goes a set down, and suddenly, it's 110mph serves and the odd lashed winner...  but alas, the effort was too late, Jankovic fell over the line, almost literally.  I did a packet on this, but I'll live.. and learn.

The trading..

It was a good month.  The first good one for a while actually, I've been treading water for a while, but December's month off gave me a chance to reassess, and to work on everything I've been doing over the previous year.  A lot of experience had been accumulated which needed processing, experience with various ways of approaching things.  December gave me the chance to put a lot of things together into a clear structure.

Really I think the best thing to have come out of this month is the importance of the work I've done away from trading.  The preparation of my strategy, the work I've done on spreadsheets and the maths and continually thinking about and improving these things as I went along, between trading sessions.

As things stand now, I have a spreadsheet telling me what I should be staking and when, and you might think that sounds like something I should have had before..  you'd probably be right !  I certainly know now how much help it is being able to know without thinking all of the numbers that are important to me during a match.  I feel this has helped me massively.

I've said previously how important just acting out a plan is, well now the thought process has been distilled to it's simplest form - seeing numbers and acting on them.  Not just seeing numbers, but being told how much and at what price..  I'm faster than before, and I'm not making the errors of judgement I was.  In fact, "judgement" itself has been removed from the equation and that is the error I made in the Williams match.. a mistake I won't be wanting to make again.  That was my one screw up of the month and my biggest loss.

My biggest win was Djokovic beating Federer.  Incredible value on Djokovic during this match, infact it kept growing bigger and bigger and for a while I thought the market might get away with it, but in reality, there's only so much pretence the market can maintain - if one player is out playing the other then it will go his way eventually.  I remember one instance of laying Fed at 1.8ish with the belief that the right price was 1.7 on Djokovic. 

My big loss took 13.2% off the bank,  the big win added 13.8% on and for the month, it finished up 38%.

If you fancy reading more, Paul at Selectabet has been interviewing me and has recently posted the first part of it on his excellent blog.  Here's to a good Feb.

Update: I notice Part 2 is also up over at selectabet.

Wanting to win...

...is similar to wanting to be rich.  A desire to win, or be wealthy, is fine in theory, but how is this going to be achieved?  How many people that want to be wealthy actually take the brave step of starting their own business and putting their energy into the process.  A desire to win is not enough, in fact, in gambling, it can be a hinderance.

The key is what you focus your desire on.  Wanting money as a gambler can be a disasterous idea.  It can make you forget, or not focus on, the things that really matter - how to win, how to improve, what really went wrong and what you've been doing right.  Furthermore, it can make you chase the money, betting too big for your bank, or getting overly attached to the money that you have lost.  Massive mental errors (and losses) could potentially occur.

The correct thing to desire, is to 'get better' at what you are doing.  Regardless of whether you do in fact 'get better', this attitude alone will give you a massively improved chance of success.

A lot of sports commentators are quick to suggest that a player "really wants to win", or "they want it more" / "want it badly".  That works in sports, but in the market for the match, you can't "want it more" than the other 1000 people you are betting against.  What you can do though, if you really do harbour that desire, is focus that energy into how you are doing things.  Give yourself targets relating to the process rather than how much you want to make or thinking about what you want to have in the bank come Christmas.  Make 'learning' your biggest "want".  Those who stop learning, are left behind.

"Money you don't lose is just as real as money that you win." - Roy Cooke

"Money you don't lose now, is money you don't have to win back later." - Larry Phillips.

"The dollar you keep from losing on a losing day is the same dollar you add to a win on a winning day." - Mike Caro.

Fail to understand these quotes and you will fail as a gambler.  They work on so many levels;

• Not losing, not doing anything in fact, is just as powerful as winning. 
• Money management is not something you can dare ever dismiss or put aside and come back to. 
• Don't let your ego stop you from admitting you were wrong - cut that loss, move on.
• If there's no bet in the match, don't 'try' to find one, you never 'have to' have a bet.
• It's fairly important to stay routed in reality - obvious to most, but not to gamblers at times.

It's worth thinking over these quotes a for a while, how many times have we all followed bad bets by more of the same?  Or got involved when we shouldn't have?  How much has this cost? 

US Open lessons: Inconsistant thoughts.

The US Open is over again for another year, Roger wins it... again, and I'm down a bit for the tournament, but up mentally after a good 2nd week. 

The frustrations of trading and gambling never cease to amaze.  You can learn everything there is to know about a market and the sport, but if susceptible, the same mental errors will jump up and take you by surprise.  Mental consistency.  This must surely be the holy grail of trading, that elusive thing that can turn an up and down (but mostly down) loser into a less variable - winner.

I've spent long days and months learning a lot this year.  Technically I'm as good as I've ever been, and I'm confident I have some sort of explanation for almost anything going on in a tennis market.  I know my strategy almost inside out, and I know when to execute.  But none of this matters, if I'm not thinking consistently and in week one of the US Open, I paid for it!

Had someone been watching my trading during that week they would not have recognised it.  They would most probably have been having a laugh at the amateurish mistakes I was making.  But that's what a poor mental state will do to you.

For me it's about tempo or rhythm to my trading.  Some might call it patience, others maybe greed.  But for me, technically I find relating it to the tempo of my trading and thinking more accurate and easier to analyse and hopefully correct.

I have a tendency when I've taken some time off to dive in too quickly.  Especially if I've had a good run before taking the time off - I tend to think I know it all (or at least, most of it) and I'm overly confident.  I get stuck in these feelings and the result is a need to make money in order to fulfil these emotions.

When I'm like this I tend to put too much emphasis on making money in each match.  And trying to make a lot of money as well.  I play too big, and I can chase - because I don't want to lose. 

I've done a lot of work in recent times on ensuring I have objective reasons to place a bet.  Solid, easy to spot, reliable reasons.  If 'this' happens then I place 'this' bet, and if 'this' ceases to apply, then I get out, and that's that.  But when I'm over confident, I begin to place bets and trades for reasons other than those that are objectively thought out - and this is no way to bet.

When I'm confident, I form opinions, very strong opinions in some cases.  I think I know what will happen next.  A book that I read recently (which I will feature on the blog at some point) states that, "the degree by which you think you know, assume you know or in an way need to know what will happen next, is equal to the degree to which you will fail as a trader" ("Trading In The Zone" by Mark Douglas).  Very heavy words, which hit me hard when I read them.

The key for me begins before I begin trading.  It's sitting down with the right attitude and the right amount of alert calmness.  I have to begin my trading session with the idea that I'm going to look intensely for my triggers (my reasons for placing bets) and then simply execute my staking plan and move on.  I have to think in probability terms, and not concern myself with losing (staking amounts you don't mind losing will do this).

The next important part is my first bet.  Execute this well, within my plan, and the rest simply takes care of itself.  The rhythm of my trading will be an unemotional one, not powered by adrenaline.  If for some reason I don't execute this trade within my plan, then the door is left wide open for the next bet to be based on emotional reasoning.  That bet will most probably only be placed because I had the first bet.  And not because there's a reason for it.  Always ask yourself, whether a trade is placed as a result of having a previous trade or because of a clear objective reason.

It's clear that your first bet must be within your plan, otherwise it is impossible not to do something about a position that wasn't taken objectively.  And I wouldn't suggest you not cut a position you took mistakenly.  The important thing is the realisation of how important each bet is and how they affect your actions afterwards.

There's no rushing in gambling.  You can't try to make money, or make an amount of money.  You have your plan and you have to play it through the same way each day.  Good runs will come, as will bad runs - but they'll never be as bad as they might, if you are consistent with your thoughts.

"Value", and the need to be right, straight away.

The two parts of this blog entry title are not compatible.  Value, and being right straight away do not go together.  It seems a lot of people think they do.  Someone who places a bet they believe is good value, who then sees the price become even better value or go against him, is a "mug" in some circles, and subject to much ridicule and merriment.

This person is not a "mug", they've simply either misjudged the situation, or have not executed it as well as they might.  Or, if they want a very large bet, they may have had to go through the market in order to get on... Especially if they don't have time to spend drip feeding to build a big position.  There's nothing wrong with any of these scenarios, what we have here is misunderstanding of what this punter is trying to acheive - and that is getting on with an edge and a view to running his position.

Our punter has no need to be "right" with immediate effect.  A price that goes against him is no cause for concern, because when he places his bet,  as far as he was concerned, the edge was there at that moment.  He's placed a bet for an amount he is happy losing and so there is no emotional attachment to the price movement at any time after he has had his bet.   These are far from the actions of a mug punter.

Why then, is there a need for many to think that he hasn't played this very well?  The fact of the matter is that many (most) people do have a need to be right, straight away.  This means that when they place a bet, the price must almost immediately head in a positive direction for them.  Should it take a negative tick or two, they will experience negative emotional pangs...  "Pain" for want of a better word.

Betfair markets are full of these types of traders.  They are extremely price sensitive.  Overly price sensitive.  (Sensitivity of price is generally a good thing, but once you are on, the sensitivity should be calmed with good judgements on taking profits / cutting losses.)

Lets take the Big Brother winners market as an example.  Here we have a market based upon who will win a tv show, decided by the voting public on what is going on in the house and being shown on tv.  As far as betting goes, there's few markets around which are as purely about opinion as this.  But even in this market, price sensitivty takes a firm grip. 

In fact, if you were to watch the market and the show at times, the two don't match up particularly well.  And that's due to the need for many to fidget over the prices.  The vast majority of people trading this are sensitive to the odds.  A tick this way.. emotional reaction, a tick the other way.. another set of emotions.  It's incredibly tough to trade this market (or any market) tick by tick, emotionally and physically.

Anyone attempting to, has to ackowledge that a single big player can come in and obliterate their position rapidly.  Anyone came come and do as they please,  and not everyone has the need for their bets to have immediate positive confirmation.  They should reassess whether their need for such a confirmation is a good or bad thing...  It's pretty obvious by now, that it's a huge hinderance.

Overly price sensitive traders have a big weight on their shoulders and emotions.  Minute by minute they watch the market, analysing the volumes on either side of the market, looking for the weight of money, big players that can cause damage and asking questions of their positions.  This is no way to spend hours trading, months if it's Big Brother. 

These emotional reactions can get you into numerous pointless trades, causing you to take profits quickly, run losers or never give things a decent chance to occur.  Decent trades are misted over by the noise created by the sheer number of reactionary trades.  Reactions based on nothing but the actions and reactions of other people in the market, and not on real life events.  If you are price sensitive, then you are at the mercy of every other person in the market.  Only one of these people has to do something you don't like to trigger a poor trade.

Remove the emotional impact of price movements from your game. 

Ackowledge the problems that exist with the various approaches.  A value punt needs executing well.  A trader needs to devise a trading plan to make it easy for himself to make calm clean judgements.  Both methods need to stake to a size which does not trigger too much price sensitivty and endless fidgetation.  Let other traders struggle with their market itches and scratches.

Over-staking, the route to fear and over-trading.

I want to expand on something I posted in my chart patterns entry where I mentioned that I got too heavily involved on Roddick at short odds.  Firstly let me say that I don't have a problem getting on something that's short odds, if it represents a good bet / position, then I'm going to take it regardless (though I do drawn the line at backing at 03 or less usually - it's needless effort for little reward).  What I did in the Roddick match however, has made a dangerous mental trap much clearer to me, and this weeks trading has been much more fruitful because of this.

I had the realisation that had I not overstaked on Roddick at those odds I would not have felt the urge to mess around with the position later on - cutting my loss, then beginning to trading at a higher frequency without much thought to make back the loss.

This might seem pretty obvious, but the actual nature of the problem has really hit home for me this week.  Over-stake past your threshold and you open yourself to the possibility of a problematic market if things don't go perfectly right for you.. and lets face it, how often can you say things go immediately your way as soon as you get on?  Not often enough!

This also touches upon a few things in my expect the unexpected entry about acceptance of risk.  When you enter a trade you may feel you have accepted it, but if you get in too heavy, you'll quickly find out whether you really did accept it or not when you begin to panic about how quickly the odds are moving against you.  This is the true test.

Overtrading is arguably the worst problem a trader faces.  It's usually (but not always) caused by a fear of losing.  You might think you can grab ticks here and there quickly, or you have a bad position so you will trade lots in order to improve your p/l ratio... Either way, it's usually as a result of not accepting risk in the market place and being fearful of losing. 

For me personally I have found this to occur when I began with a position that was too big.  It's beyond my pain threshold to lose this amount, I would be very uncomfortable with that loss.  Under such circumstances I can freeze and stop thinking until finally I cut the position... normally this is at a market high or low, corresponding with my moment of most intense panic (there's a reason highs and lows are usually spikes or crazy prices that correspond with market panic). 

After this has occured, I'm usually rather annoyed to put it mildly and will begin to look for more and more positions to take, perhaps even guess which way things will go, when I get them wrong I cut quickly and look for another, and another.  I'm now, overtrading.  It doesn't take a genius to see that there's a very high probability I'm going to keep losing more and more money each time, and that it'll take a lucky break to get close to getting out alive.

That's a fairly extreme example, but contrast it to a position I take where I'm actually comfortable with the stake size.  An amount that I don't mind losing and that I think is appropriate for the position I'm taking.  I'm happy and prepared for this not to go my way because I don't mind losing the bet, I've accepted the risk in the market and the match I'm betting on and most important - the risk of this amount of money.

Mentally I'm secure and calm.  There's no panic, or possibility of panic entering my head at any time in this match now that I have staked it properly.  I'm free to follow my plan, I know why I entered the trade and I know what reasons would cause me to exit it and I'll act on them - no freezing here.

It's amazing how easily this can go unnoticed.  Yes I've known for a very long time that going in heavy at short odds is potential trouble, but the exact reason why has been elusive to me.  And it's not just short odds this applies to, it's all odds and bets.  If you overstake them beyond an amount you mind losing, then you are opening yourself to all kinds of trouble.

How do you know what the right amount is?  Tricky question.  It's easy to give answers such as, 2% of your bank, or a specific amount and or some amount specified by the many staking plans out there.  I don't disagree that you need to stake things ina technically correct manner, but to get the right size I think has to come from yourself.  You know instinctively when the urge rises to tamper with a position (because you are fearful of losing) that you have too big a position.  Cut down the size of the position and re-assess comfort levels.  When you find the right size, stick with that until your bank has grown enough to facilitate a raising of these comfort thresholds.

The last two weeks have been kind to me, because I've been placing positions where I've been in control and acceptance.  And on top of that, I've cut when I had reason to and run the rest of the positions, most of which have won thankfully.  I've placed bets with a specific size at various times of the matches and I've stuck to it, it's been a breath of fresh air really... not having to grip the mouse with white knuckles all the time!

Remember this, if the only reason you are cutting your position is because you don't want to lose that amount, you got in too big in the first place.  Make sure you stake correctly so that you cut only when there's a real reason to do so.

Foolish zen.

A long time ago I subscribed to Fool.co.uk's daily news letter.  I don't normally read them much these days, they arrive in my inbox and I just delete, but one came by the other day that I thought had some good words in it.  Those that have read here for a while will know my liking for all things zen, especially relating to trading.  This article by them - Zen and the art of portfolio maintenance, has some points relevant for investors and traders / gamblers alike.  Namely, seeing doing nothing as doing something - in other words don't over-trade. 

It's not a long article, but is worth a quick glance..  Quote:  "It's a busy, fast-moving world. Sometimes, you feel the need to be dynamic, to keep pace with life; in short, to do something.  As far as investments are concerned, this is a fundamental mistake many of us make regularly...."