I am a former professional poker player. I play at least 300 days a year 365 days a year, at least 10 hours a day, and we can generally play 20 hands an hour. So I have to play at least 60,000 hands a year.
1. Risk Stratification Theory
Risk, risk! We traders are the most helpless and disliked these two words.
Because in the world of traders, risk means loss, loss means failure, and failure means…In short, many unpleasant things are caused by these two words, so countless traders I have communicated with all restrict Put risk in the most important position in your trading system.
Some of them are doing their best to optimize their systems, hoping to achieve the goal of avoiding risks, but the reality is cruel. No matter how they struggle, losses will always occur and never stop, but in the end, it is a loss or a loss. It’s just different.
Another part of traders recognizes and puts forward the concept of the same source of profit and loss. These people have formulated rules that are quite risk-inclusive in their system. They believe that loss is an inevitable cost of the trading system. If you deliberately avoid risks, this It also makes you lose the opportunity to profit from the market.
It can be said that the performance of the latter type of trader is far better than the first type of trader. Among the latter type of traders, quite a few people have reached the level of stable profitability.
And because of my own past experience that is different from ordinary people, I have got a lot of opportunities to face the most essential aspect of risk repeatedly, and these unique experiences have allowed me to come to my own unique understanding and view of risks in trading. I call it risk stratification theory.
In my trading view, I believe that risk is not single and constant, but has levels. Why did I come to such a conclusion?
This starts with my experience as a professional poker player. I saw this passage, “I originally felt that 80% of the market conditions might have a big opportunity, but the result did not come out. After being brushed a few times and missing a big opportunity, my mentality became unbalanced at once, leading to random operations in the market, and finally losing 20%. % Stopped.” In the process of playing cards myself, I often experience much more extreme situations than this.
I remember that one time I played to the end, only I was singled out with a player, and the last card was to be dealt. There were already 3 squares on the table, and I also had two squares in my hand. The biggest one was a square. J, I have become a flower. And my opponent has to deal another diamond to win me. One of the two cards in his hand is a useless miscellaneous card and the other is a diamond king.
There are only 13 squares in the whole deck. Now the two of us have taken 3 squares and 3 squares have been issued on the table (a total of 5 cards have been dealt on the table, and now 4 cards have been dealt and the last one is left Card) That is 13-6=7 and 7 squares, and a deck of cards removes the king and the king, a total of 52 cards. For a 4-player game, 8 cards are dealt in the starting hand, 4 cards are dealt in the community, and the cards are cut. Lost 3 cards, and the last card is dealt from the remaining 35 cards. Then the probability of him winning me is only 7*35=20%. My winning side is 80%, and the opponent’s winning side is 20%. Isn’t it a pleasure?
Then before the last card was dealt, he could make another bet. He asked me, how much money do you have? I replied with a total of 50,000, and he said that’s okay, I will pay all your money, 50,000! I don’t need any deep thinking. It only takes 1 second to confirm that he is stealing chickens. There is almost no possibility that the cards in his hand are bigger than me, but he gave me a huge bet. The pressure, because he directly pressed all the net worth on my table. Although I have already determined that he is stealing chickens, hoping to force me to fold and steal the pot through a huge amount of money, the absolute amount of the pot with a total of more than 120,000 still gives me a lot of pressure. (The two of us counted the last hand and each played more than 60,000, so the total amount exceeded 120,000.) Of course, I have no choice but to CALL.
After the card was opened, I found that he had only one king. I was naturally quite happy because I was already quite professional in playing this game. I calculated in my heart that my winning side was 80%, which was 4 times that of my opponent. While happy, there are still considerable worries. After all, 20% say high is not high, and low is not too low to the extent that it will not happen at all. After 2 seconds, the card is dealt out, it is really a square!
I did not make mistakes in all aspects of probability, judgment, calculation, courage, etc., but I got the result of losing a six-figure pot. In less than 3 minutes! If it were you, how would you feel?
And I can also tell you that although the previous event is indeed a small probability event from the point of view of probability, in fact, we encounter it every day when we play cards. Once this happens, many players will lose control of their mentality. , And the result of losing control of your mentality is terrible. It may cost you another 100,000 in less than 10 minutes.
So although I firmly play into the hand (that is, I only play with my opponent on the premise that the probability of winning is greater than the opponent. This is because there is an obvious probability advantage in the long run), but I can’t stand being People have a small probability, and the absolute amount is quite large.
So in my free time, I will talk to my friends who are playing cards with me about how to avoid this situation. The result of the discussion is very frustrating, that is, we find that this type of risk is inevitable no matter how we do it. We call it “systematic risk.”
The so-called systemic risk is not transferred by our will, but is given by its game rules at the beginning of a game. Systemic risk has the following characteristics: it is inevitable, always present, and there is the same win and loss!
You can simply imagine that if we assume that the person has the same hand and the same play style, we play 5 times in total, can it be said that the reason for my profit and the reason for the loss is the same, which is called winning and losing Homologous. (The reason why I lost the table to him this time is that he wanted to use the rules allowed to steal my chicken by the absolute amount of money, and then defeated me by luck. But next time if luck is not on his side, then The reason why I won so much money from him is still the same.
He wants to use the rules to steal my machine by money, otherwise it is impossible to get all of me with his strength at the time.)
If we analyze this matter purely from the perspective of probability, then the more such cards are played, the more profit I earn should be closer to the number given by theoretical probability, right? I believe no one will object to this, right? That is not the case. This is the conclusion drawn after observing the actual results of a large number of professional players and myself.
That is, the values obtained in actual combat will vary from person to person, rather than being perfectly consistent with theoretical values. . The results of different people have relatively large deviations. If the data obtained by probability statistics varies from person to person, is such data still meaningful?
Why is the theoretical perfection such a big deviation after the test of actual combat? This is because the risks we take are not just systemic risks.
We have heard some old sayings in the field of speculation, such as talent is the biggest source of risk, and the person who should be the most careful is myself, etc. These words all expose us to another type of risk, which is human subjective risk.
Taking the previous card game as an example, you can imagine how difficult it is to calm my mood after losing this card. If I have a little control over myself, the decision I might make is not to leave the table and go back. I lost my chest, but I took more money to go to the table and mess around.
Almost no one in Texas will not encounter the situation of losing control of their mentality. The difference is that the fish may lose control for several hours or even the whole night, and then leave the table with a huge loss. If his mind did not lose control, he would never lose such an outrageous number.
Professional masters can generally calm down within 1-10 minutes, because we know that losing your temper will not help change things at all, but will only make people take advantage of it. We will treat the money we exported as temporarily with the lucky fish, and we also believe that sooner or later, the fish will return my money, and even bring profit.
It is precisely under the deviation of controlling the mental power that different players get completely different results under the same perfect probability theory, and the type of risk corresponding to this kind of situation is not the systemic risk of the same win and loss, but Human subjective risk.
The characteristics of subjective risk for all people are: theoretically they can be avoided, they will only cause losses, and will not bring profits. They are all due to their own mistakes. It can be said that the quality of a professional poker player mainly depends on how he controls the subjective risk. Because systemic risk is uncontrollable and unavoidable, such losses are constant, and profits are also constant, but this Profits must also be deducted from losses caused by human subjective risks. And this is the root cause of the serious deviation of the final result of the perfect theory in actual combat due to differences in people.
Imagine that a player only bears systemic risk (assuming he is perfect), but you have to bear both systemic risk and human subjective risk, so as long as the risk you cause is greater than the system you adopt The difference between the risk and profit brought to you, your result is already doomed, no matter how you study the betting mode, how to improve your system is of no use.
Fortunately, although the man-made risks are huge, they can be overcome. Of course, they are not easy. This requires you to control your mind well and achieve the unity of knowledge and action. But there is a way out.
It is difficult to face the first two risks alone, but Texas Hold’em is not limited to these two types of risks, it also has a higher level of risk that you need to bear, and this is why the poker game can become the world The greatest and most popular boxing game on the web. That is strategic risk! It is this strategic risk that has transformed the German poker game from a gambling game into a great game.
The so-called strategic risk has the following characteristics. The risk imposed on the opponent or by the opponent is the same in theory. But unlike systemic risk, such risk (and profit) cannot be measured in probability. , And systemic risk can be measured and measured by probability statistics.
Strategic risk does not have a statistical model that must succeed or fail as many times as you do, because it is highly technical and individualized.
In short, what is strategic risk?
Those of us who are stocks must know that the stock market has a major force, and the major force will deliberately mislead retail investors. The major force clearly wants to start the market but deliberately has a big drop first, causing us to not see the true direction. Sell when it is time to buy, what to sell Time to buy. Such behavior is a risk imposed on us through strategy.
Similarly, if we see through the main force’s misleading, we have found the most solid buying confidence and evidence. Therefore, we will not only make wrong choices because of the main force’s misleading, but also obtain opportunities and profits because of the main force’s behavior. So this is the same win and loss.
But the analysis of the main operations feels okay, as if there are risks and opportunities, but why do retail investors always suffer and get hurt when it comes to real operations? Because this is determined by the high skill of strategic risk.
The operations performed by the main force are based on the opposite of human nature. If you want your operations to keep up with the rhythm of the main force, you must be able to perform operations that go against human nature. You can never do this kind of operation if you are not based on proficient control of your own mind.
This is also the fundamental reason for retail investors in the market who always like to buy stocks that have not yet started, and turn a blind eye to stocks that are the main force launching the market. the reason!
The main control is to use their trading skills to make the trend of the stock go against human nature, so that many small people can see but can’t keep up. The result of such strategic risks for retail investors is that they cannot capture large fluctuations to hedge their inherent systemic risks, and then their mentality deteriorates, and then they take the initiative to create subjective risks on their own, thus failing to reach the market. The purpose of profit.
From the perspective of the difference in risk-taking types, retail investors are already at a disadvantage when facing the main force, because the main force only assumes two types of risks: systemic risk and human subjective risk (the main force is also the main force and the main force will also make mistakes, but the main force level It’s much higher than that of retail investors. It’s like professional poker players have mistakes to ordinary Texas Hold’em poker players. It’s just that professional makes much fewer mistakes than amateurs).
However, strategic risks have been completely passed on to retail investors through technical control and operations that violate human nature, and at the same time some systemic risks have been passed on to retail investors.
Retail investors suffer a lot. Not only do they have to pay for systemic risks, but they also have to bear the subjective risks caused by their inexperience or misunderstanding of the market or loss of control of their minds. At the same time, they have to be imposed strategies because of the main force’s manipulation. The type of risk is on the body, so the success rate of retail investors is so low that it is natural that they cannot make money.
There are so many types of risks that need to be hedged, and the meager profits obtained by retail investors are enough to see, and they can only hedge their own capital by constantly losing their own capital.
In fact, it’s not easy to recognize the existence of the third type of risk when playing stocks, because the form of expression of stocks is too complicated, but Texas Hold’em is different. Each of us can use skills like the main force in the stock market. Strategy, and achieve the purpose of misleading opponents. Relative to this point, the stock market is very unfair. We can only be attacked by other people’s strategies, but we cannot actively attack the main force. The only thing we can do is to use our ability to identify and judge the main force’s tricks.
Having said that, let me summarize, I think the stock market has the same three types of risks as the poker ring game, or that any game field will have these three levels of risk.
Among them, systemic risk is unavoidable and does not need to be avoided, because if you avoid it, you are also avoiding profits; while man-made risks must be avoided because they cannot bring you profits by themselves, but you need to use profits Hedging, so the more you avoid, the more profit your system can leave you; while strategic risk is the most difficult type of risk to grasp, but it can also bring the most generous returns. It’s just that it’s too skillful and requires people to have a high level of quality. It requires people who not only master the game, but also can easily control their own minds, in order to reverse the risks imposed on you by the main force, and achieve extraordinary results. profit.
Strategic risk cannot be avoided either, because it is imposed on you by others, but the beauty is that it is the same source of profit and loss. It can be risk or profit, which varies from person to person, depending on your level of practice. But because of its anti-human nature, traders need to have excellent coping strategies and perfect mental control, and this is the real hardest place to learn.
At the same time, I also think that the stock market is not a purely probabilistic trading market because of the existence of strategic risks. It is a market dominated by games and supplemented by probability. The most fundamental reason that determines your profit in this market is not your ability to calculate probability, but the competition of your ability to fight.
Therefore, based on the above understanding, I set up my own unique main force for trading system. This system is based on the trading model based on Boxi as the core, spiritual control as the premise, and quantitative probability and statistics. Because it’s a game, it can’t be a mechanical system. There is no fixed law, and Tao is very Tao. The only constant in the world of Bo Yi is change, but although there are some essential things that have changed, they have never changed.
2. Why stratify risks
Here I want to talk about some of my own different understandings and understandings.
First of all, why should I stratify risk? Because I think that in the face of different levels of risk, what I need to do is different.
Faced with the first type of systemic risk, I think the best way is to tolerate, not to avoid it, because systemic risk is like the sea, and you and me are like ships on the sea. How can a ship at sea escape the risks of the sea? The only way is not to go to sea, put in the transaction is to leave the market completely.
But we are not here without a reason. We may be here for fishing, or for transportation, but one thing is certain is that we must be here to pursue profit!
Leaving the sea leaves the risk of being swallowed by the sea (and this risk always exists) but also leaves the profit we want. Winning and losing the same source is definitely not a simple sentence, but a completely effective concept even in real life. Since it is destined to be unavoidable, and there is no need to avoid it, do we have other choices besides using reasonable rules to accommodate him in the system?
The second type of risk-human subjective risk corresponds to the necessary development process of objective things. None of us are born to know, we all need an objective process of learning and understanding a thing. In the process of learning and practicing, we will make mistakes, we will be stupid, and we will be naive! But in the end we will gain a more objective understanding of the market or anything else, that is, we are mature. And from the beginning of learning to the process of maturity, each of us in the financial market must pay an extremely expensive tuition. Many people do not want to pay, or pay less.
But the embarrassment is that unless you are a genius with no one in a million, you will always have to pay for what you should pay, otherwise we will not be enough to truly mature. And the most critical factor that really determines how much we have to pay for this tuition fee is not how correct our attitude is or how hard we work, but whether we have mastered the ability to control the soul. If you can manage your mind proficiently, it is like a one-time tuition. It does not depend on how big its absolute value is, but whether you will pay tuition repeatedly for the same thing in the future.
So when I write here, my response to the second type of risk has also come out. When I was immature, I naturally had to pay a decent tuition to the market, but when I had an objective understanding of the market, I would take control The ability of the mind to hedge against losses caused by subjective risks.
My attitude towards the second type of risk is that I accept that I must pay a reasonable tuition fee, and then through my growth and proficiency in the ability to master the soul, I can avoid such risks as much as possible. Yes, I simply put my attitude towards the second type of risk is to pay when I grow up, and avoid it when I mature. This is completely different from the attitude towards the first risk!
The third type of risk is more complicated, because it is a game-type risk. The risk of the game type is your counterparty, specifically designed for your or the public’s trading patterns or behavior patterns, to invalidate the public’s system, resulting in losses and undermining the public’s mentality, thereby achieving self-interested behavior.
I read this passage in the book “The Financial Empire”: “The bull market in 2000 was very complicated, during which there were many surprises and rapid downturns. I used the stop every time there was a big downturn. Loss strategy to protect myself, but the market always laughs at me time and time again. People around me are taking advantage of bargain hunting, which brings me tremendous pressure. After three invalid stop losses , I finally gave up the stop loss strategy, and the result was that the only trade without a stop loss made me lose 6-figure funds.”
I don’t know what all the friends in the German circle of friends have read from this passage. I have used my game-type thinking mode to read a lot of things from it. First of all, this experience of the financial empire was definitely targeted by the main forces or market leaders using strategies. The result of such targeting is not only the imposing of game risk (multiple invalid stop loss), but also the cost of the execution system has risen a lot, greatly reducing the theoretical profit margin. What’s more frightening is that it also destroyed the financial mentality and triggered the second risk, causing even greater losses.
Here, in fact, it also corroborates a very important argument in my risk hierarchy theory, that is, if you do not handle different types of risks, they will pull each other and generate new risks. The third type of risk was imposed on him by others without knowing it. Not only did he have to bear the loss caused by this type of risk, it also triggered the second type of risk, which led to a greater loss.