SwanIn my limited experience, risks such as the "Black Swan" type are unusual. Most of the risk we newbie traders assume are not real risks — only mismanagement of risk. One of the most common is "impulse trading" (i.e., trading without an edge or overtrading).

Well, last week I had a lesson on Impulse Trading. I was driving with my family (wife, kid and the nanny) to the border of our state and country — Jaguarão, a city on the border of Uruguay — to do some shopping at the free market shops.  The travel couldn't be by plane (there's no airport there), so we went on a 5+ hour driving trip.

You know, my boy is almost 3 months now — and he is my first son. So I was driving in a long (for me) journey with my boy in the car. There were moments where one, two or three trucks were  blocking  the road, and of course, I wanted to pass them. Another time, I would risk every chance to pass them. But now I had my kid in the car so I only took the completely free-risk shots. There was nothing in  the world that would made me risk my boy's life in brave and daring driving. No way!

Immediately I felt ashamed of the times I took trades that were not "high Sharpe situations". How could I be so risk-idiot? For a person not money-centered (which I believe I am not) trading is the most difficult challenge. Because it's so easy to mismanage risk. "Oh, it's just another losing trade - no big deal". It is a big deal!

If I approach trading with the notion that my wife and kid are in the car, I will become the most aggressive risk manager. And they are: the money that is lost is the money they will not enjoy — and, G_d forbid, money that they will lack.

So, from now on, my wife and kid are in the car on every trade!

Scott Brook reacts:

Black Swans may be rare, but they are game-enders.

That's why you should never go "all in" when playing poker. I get derided all the time for saying this, but I made a lot of money playing poker back in the 80s using this strategy. Of course, that was in the days when you could play stud poker and not this "Texas Hold'em" crock that they play today. In today's MTV fast paced, leverage to the hilt world, you have to go all in to compete. Otherwise, people aren't interested in doing business. They want the big returns and they want them now, "D%mn the torpedo's, full speed ahead!"

You could call me a grinder. I always found a way to grind out a winning night playing poker. Sure I was boring, and yes, I was still subjected to the occasional black swan, but even after the swan wreaked havoc on me, I might have been wounded, but I was still standing and able to play the game.

P.S.: I've also traveled cross country with small children. I found it to be a less than pleasant experience. That's a black swan I would like to avoid for the rest of my days!

J. P. Highland adds:

1. Poker is a great trading boot camp. Folding is the hardest part to master, learning that second rate hands usually finish second.

2. In trading you have two opponents, one is Mr. Market and the other one yourself. The second is a tougher SOB to manage.

Steve Leslie writes:

Tournament poker and cash poker are two distinct animals. They are entirely unrelated and require different skills. WSOP main event is no-limit hold-em which for years was a very small event. Look at the event fields up to 2002 — they were quite small. When Johnny Chan won his first title I think fewer than 50 people were involved. All that changed when Chris Moneymaker won. Also the big game players like Greenstein, Reese, didn't even play tournament poker. TV and the Internet changed all that. Now last year's winner was under 24 and beat Phil Hellmuth's record set back in 1987. Their techniques comsist mainly of bluffing and hyper aggression. Most crash and burn early but there are so many of them like ants that it is impossible to kill them early so some make it to the latter stages. Mr. Brooks and I are anachronisms. Try to find a seven card stud game or draw poker. They don't exist anymore. Nobody knows how to play them. Even Omaha is difficult to find. In the Cincinatti Kid they played five card stud. When I played poker in the 1990s they were closing up card rooms. All that is left today is no-limit hold-em cash and no-limit hold-em tournament. Finally, the skills you can learn from poker are transferrable to trading on many levels. Others have written exhaustively on this. I strongly suggest two books: Zen and the Art of Poker by Phillips, and Zen in the Martial Arts by Hyams. Start there.





Speak your mind

15 Comments so far

  1. Another View On Risk – On Daily Speculations « Random Thoughts Of A Trader’s Toil on August 31, 2009 9:57 pm

    […] Another View On Risk – On Daily Speculations Filed under: Uncategorized — newtonlinchen @ 2:23 am This is a post of mine at Daily Speculations about Risk in Trading. Leave a Comment […]

  2. Jesse Liverspots on August 31, 2009 11:32 pm

    Trading stock. Poker. Gamblers.

    Although the list choka block with long term investors and long term builders and owners of businesses, I have yet to see a single one on the list of Forbes Richest people who were traders/gamblers.

    I do see quite a few ex traders, and gamblers pushing shopping carts here on the beach.

    There are a whole host of ‘em as well, swinging on the wrong end of a rope.

  3. Gangineni Dhananjhay on August 31, 2009 11:36 pm

    Hi Newton,

    In your words Risk takes on new meaning. I can relate to this post as I am feeling about management of my trading risk with my wife and my daughter as my customers. It is the best antidote to random trading, IMHO.You are spot on about mismanagement of risk by Newbie traders

  4. Jeff Watson on September 1, 2009 12:17 pm

    @ Jesse

    The Palindrome is a speculator and he comes in at 29th on the Forbes 400 list.

  5. curmudgeon 3256 on September 1, 2009 12:27 pm

    @ Jesse

    How about Paul Tudor Jones at number 224.

  6. Laslo Minks on September 1, 2009 1:17 pm

    Come on, Scott! I take issue with your denigration of Texas Hold’em.

    Going “all in” is not analogous to betting your bank roll. It is merely a tactic in No-Limit, and you cannot win without using that tactic from time to time, particularly in a tournament.

    And Texas Hold’Em has nothing to do with the “MTV world”. Binion’s world series has featured No-Limit Hold Em as the main event for over 50 years. Its recent over-popularity has to do with both the rise of the Internet combined with ESPN finally figuring out how to show a player’s hand on TV.

  7. Scott Brooks on September 1, 2009 2:03 pm


    I still hate Texas Hold'em. There are simply not enough data to give me an advantage over my opponents. In Hold'em, the most data you get is seven cards. In 7 Card Stud, when playing at a full table, I get a huge amount of data from which to calculate my odds of winning.

    I'm sure you can do that in Hold'em, but I'm not smart enough to do that with any amount of consistency.

    When I played poker for a living (well, kinda played it for a living… I made good money doing it, but had a real job too), I never played Hold'em. I stuck strictly with 7 Card Stud.

    If you have a pretty good memory and the ability to do calculations in your head, 7CS is the way to go!

    As to going all in, please watch the tournaments carefully on TV. Notice that when someone goes all in and loses, he leaves the tournament and doesn't come back. He may still have seed money stashed away somewhere, but he's definitely out of that tournament.

    In today's MTV world of fast moving "all-in" go for broke poker, there is no room for a grinder like me.

    But then again, I guess it's always been that way as you point out that the WSP has been using TH for over 50 years. I guess that's why I never played in tournaments. I was less interested in the fame of the tournament and more interested in quietly making good money in the back room against the gamblers who stood absolutely no chance against a player like me who could, at the end of the night, tell you every card that was played and in what order those cards came up for every hand throughout the night, nor could they calculate in their heads what the odds were that I held the winning hand or what the odds were that the "next card" could hurt/help me.

    So to be fair to those who like TH, it is a good game and there are those who are good at it and I respect how the WSP has parlayed itself into what it is today. Even if I don't like the game. I respect it!

  8. NEWTON LINCHEN on September 1, 2009 4:23 pm


    It sure does keep us from random trading!

  9. mrn on September 1, 2009 6:19 pm

    yes, what soros does, can not be explained. it’s just out of this world. i’ve heard each and every hypothesis, but i can’t fathom how he does it.

  10. manuel bravochico on September 1, 2009 10:55 pm

    @liverspots {i like the name…}
    I thought there was no such thing as a moronic post. I've disagreed, but could see the argument.
    Now I know there actually really are moronic posts.

  11. Matt Johnson on September 2, 2009 1:08 am

    Alright - forget poker…it's a card game not trading.
    Good for you for pushing forward, most men fold at this level - well done.
    Here's the bottom line about swans or any other thing about the market that traders truly don't get.

    You, alone, have the POWER and ABILITY to STOP the trade.
    This is a BIG lesson.

    Let's look at the silly game of poker (limit), or any other game at the casino. You make a bet or several, depending on the game, then the game ends - no matter what you do - it ends, you don’t have to stop the losing, it’s done for you - you win or lose… In trading there is NO ONE there to STOP the GAME, but you… This is POWER. You, alone, can stop the game. Most traders, can't/won't, they hope, then they blow up.

    The first question you should ask yourself after you take a position is “where does the market have to trade in order to show that I am wrong?” Answer this question BEFORE you open the position, this way you’ll answer it sober. Then, if the market trades to the stop level, you’ll say, hey, when I had no skin in the game, I said I wanted to be out here… Then DO IT.


    PS Congrats on the kid, your life, as well as your trading is going to get a 1000x better… put on your helmet and hang on.

  12. luigi vigilante on September 3, 2009 6:32 am

    … actually the Forbes Richest people list is full of traders & gamblers because in order to be a successful entrepreneur you need to be a trader and a gambler at heart … maybe its more correct to say that the list hasn't got many people that are professional financial market traders (apart from the soros', cohen's, tudor's etc), but i think this is only because the percentage of entrepreneurs that do our job on a full-time basis is minimal, so its less probable that many professional financial market traders' names would show up in the list …

  13. Diego Joachin on September 3, 2009 10:19 am

    Ignoring "your family in each trade" is what Brett Steenbarger names as chunkie traders. Thanks for the post. Very telling for this wannabe speculator.

  14. Rocky Humbert on September 3, 2009 10:35 am

    @Jesse Liverspots:

    In fairness to your comment, some number of the following members of the Forbes 400 list (2008) have mediocre investment performance, and their fortunes came from building an asset-gathering machine that produced outsized management fees. Nonetheless, some of the following people certainly can be characterized as successful speculators/traders.

    Forbes Ranking / name / description:

    #163 John Arnold (nat gas trader)
    #262 Louis Bacon (hedge fund)
    #355 Richard Chilton (hedge fund)
    #36 Steve Cohen (hedge fund)
    #78 Ray Dalio (hedge fund)
    #281 James Dinan (hedge fund)
    #105 Stanley Druckenmiller (Sor*s partner)
    #377 Glenn Dubin (hedge fund)
    #262 Issie Englander (hedge fund)
    #163/#365 David & Noam Gottesman (hedge fund)
    #97 Ken Griffin (hedge fund)
    #123 Paul Tudor Jones (hedge fund)
    #105 Bruce Kovner (hedge funds)
    #227 Marc Lasry (hedge fund)
    #227 Steve Mandel (hedge fund)
    #95 Dan Och (hedge fund)
    #262 Raj Rajaratnam (hedge fund)
    #262 Julian Robertson (hedge fund)
    #155 David Shaw (hedge fund)
    #41 James Simons (hedge fund)
    #28 George So*ros (hedge fund)
    #321 Thomas Steyer (hedge fund)
    #377 Henry Swieca (hedge fund)
    #266 David Tepper (hedge fund)

  15. Steve Leslie on September 5, 2009 8:36 am

    One of the most enjoyable posts in a long time. Very insightful and helpful. Also humorous. You guys are arguing with someone who does not have the character to use a real name. For all you know you could be arguing with an imbecile living in a mental institution. Or a 12 year old pre-pubescent at prep school. Hilarious.

    With deference to Rocky who I have great respect for your well researched and exhaustive list of richest people is very enlightening. And are we to assume that wealth is some magical indicator of intellect or wisdom or altruism. I know plenty of rich and mega rich people who are so stupid that if you cut off their head they would not be any dumber. Some are so disgusting that you would not want your 14 year old daughter or son in a room with them. Fact is Saddam Hussein and other dictators are some of the richest people in the world. Hussein stole billions from Iraq as did Marcos, Noriega, Chavez and others. Are they somehow wonderful people?

    Vaya Con Dios. Look me up on Facebook. Add me as a friend!


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