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The Nature of Risk: Justin Mamis - Discuss this book!


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The Nature of Risk: Justin Mamis - Discuss this book!

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  #1 (permalink)
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This book is as good an introduction to managing risk in the markets as it gets; its rather old (almost as old as me, written in 1977!)

The Nature of Risk: Justin Mamis

This is a book which both @DbPhoenix and @FuturesTrader71 have mentioned so it had been in my must-read list and the reading is complete - please stay tuned for the review, and meanwhile other readers can contribute their thoughts as well.

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Too often, beginners are all too eager to begin their discovery of the market.

Indicators wave and blink, prices turn deep red and olive green making the itching to DO something deeper, alerts sound like the jingle of a cash register!

Step in Justin Mamis!

An advisor to institutions, and publisher of the "The Professional Tape Reader" he has earned quite a bit of fame. But this is about the book, not about Justin Mamis, so I digress.


The first paragraph is enough to intrigue the first-time investor and the burnt and scalded speculator alike.

(It is likely to be scoffed at by the super-successful-from-the-start-newbie; "luckily" I am not one of that creed)

Here is how Justin starts of the seminal work:

The first word parents want a baby to understand and respond to is not Mama or Daddy - it's No.

.
.
.
.

Parents know all about the dangers of the world. there's the hot stove, the steep stairway, the electrical outlet.


Infants believe that they can crawl across the entire universe, unaware of the edge of the bed.

.
.
.
.
.

Of course, as we toddle ahead in life, we are forced to, or are taught to, to overcome certain anxieties.

.
.
.
.


Everything is risk - "I could get hit while crossing the street". But we can reduce the risk of crossing the street.

.
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Although infinitely more complex, the stock market is more like crossing the street.

(Those professional types who throw up their hands and claim the market is unpredictable simply don't understand the nature of risk.)

.
.
.
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There are no perfect, risk-free ways to cross the street.







Those were very important snippets (IMHO) from Chapter 1. This is the chapter that sets the tempo of the book, and as we shall see, the book lives up to its expectations as a guidebook to crossing the street safely.

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Nor does this sense of danger disappear as we gain experience. to the contrary, a new risk develops: ego risk.

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.
.
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The difference between the top tennis players int he world and the next rung down... is not the strokes.... but the mental attitude. The top players play to win; the others play the game so as not to lose.

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The sense of ego risk does him in. In contrast, the top players ... when behind serve an ace. And by playing past the anxiety of the risk, they win.

[whereas the others] deciding they were going to lose anyhow, they simply started to hit the ball, that ease, with nothing at risk anymore, took them to 5-5, whereupon the ego risk returned. As soon as they might win, the caution returned and produced the tentativeness that caused them to lose.



(Side note: Doesn't this all sound familiar to some of us aspiring TST combiners! And it was exactly what I heard with almost the precise same details in Ray Burchett's sample 20 minute webinar for "Intuitive Trader Development", the original promises to be 8 hours long, of which I will be posting review when I complete it)

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Thanks for posting. I am in the process of reading it still but I will post a review as well when I am done. The street analogy is so good contextually I might add

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Taking a breather from Game of Thrones to read this book instead lol. Will update with more details as I read

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Bermudan Option View Post
Taking a breather from Game of Thrones to read this book instead lol. Will update with more details as I read

Looking forward to the review.

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josh View Post
Looking forward to the review.

I figured I might as well write my review now since I can't bring myself to finish this book. There is a different tone w/ the latter portions of the book that made me mentally disengage. With that said, the first third of this book is definitely worth it.

To summarize the good portion of the book (which will admittedly not do it justice) Mamis creates a framework on the seemingly hackneyed Warren Buffet quote "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful". Personally, when I hear that quote, I think to myself, "Well thats great.. I didn't take advantage of the last recession, but when the next recession happens in the next 5-15 years, hopefully I'll be ready." It definitely feels slanted towards investors but, like most of the board, that is not my modus operandi. What Mamis does, however, is reframe that idea so that it is more tangible as a trader.

The theory that Mamis presents is that fear of being wrong prevents us from entering positions when risk is at its lowest point; and we instead wait for a confirmation which increases our risk. For example, let's say we have stock ABC on our watchlist. It is consolidating and so as traders we are attuned to the idea that when stocks leave a trading range, it usually does so in a hurry. Since this stock has been trending higher in the long term, we are expecting a bullish breakout.

If the current trading range is between $100 - $105, most traders will play the consolidation trade by entering when the stock 'confirms' a bullish move higher by breaking above $105. However, if the breakout is temporarily faded and the stock regress to its previous 100-105 range, you as a trader have to either

a) cut your ties on ABC when it is, at worst neutral (but imo still bullish overall... it likely just needs a bit more time before it can break above resistance definitively)
b) Stomach $6 of risk before the low-end of the price range ($100) is definitively broken; invalidating the consolidation pattern.

(Also note that I always try to have a Risk:Reward ratio of 2:1, so if I decided to risk $6 in the trade, my target price would be at least $12 away @ $117)

Most people trade like this, buying when bulls show strength... but Mamis instead advocates buying when the bears show weakness. So for example, if I decided instead to buy the stock at $100 (when I see shorts covering and/or when a higher low was developing) I will be entering a much stronger position. I will know much more quickly if the consolidation breakout has failed as it now only take $1 for the stock to definitively leave its previous trading range of $100 - $105. Since my risk has been drastically reduced compared to the previous example, I can restructure my target (and expectations) in a way that is very positive to my capital and my mental capital. If the breakout attempt above $105 fails, I can still pocket close to $5 in profit (Risked 1 to gain 5) OR I can sit in my positions much more comfortably... since I now have $5 in profit, I would be much more accepting towards the idea of waiting to see what happens than if I was in the hole as soon a I tried to buy a breakout that failed. Also, if I decided to hold and the profit target of $117 that the other trader set was hit, my risk:reward is now 1:17 where as if I brought the breakout, it would have been 1:2.

^^^That is an example that I wrote based on the belief that Mamis instills in the first portion of his book, but like I said, it really doesn't do justice to the book. My account is a factual statement, but when you read Mamis' book, it becomes a belief that seems so evident in retrospect that it almost stuns you as your mind moves all of your old beliefs onto the new foundation that Mamis sets forth and they fit perfectly.

The remaining portion of the book is rather dry. It isn't that it is wrong or poorly written, but it rehashes a lot of ideas that are conveyed in most trading books about divergences and indicators. I think the reason why this is so boring to me is that I have my own trading strategy, and the first portion of the book can be applied to any trading strategy, whilst the latter portions are tips and ideas relating to the specific trading strategy that Mamis believes in like watching the Adv/Dec Line or other techniques from the 80s.

In review, Mamis' approach to risk goes against a lot of what we are taught about retail traders. The first time I heard about this book was an example of this. In FutureTrader71's webinar (and thread), he touched on this idea and got a lot of push back from retail traders, because to most people, it looks like stepping in front of a freight train, but really it is like jumping on a pendulum that has swung as far as it can in one direction and is about to swing back the opposite way as it always does in nature. There will be times when the pendulum still has a little further to swing, and in these instances you may get stopped out, but Mamis' theory is about allowing yourself to be proven wrong.

It reminds me of something I heard years ago to the effect of, "In school, when the average student comes across a word they do not know how to pronounce, they mumble it under their breath to hide their unfamiliarity with the word. The intelligent student is the one who says this word louder than all the others, because only that student will be corrected and learn from the experience."

If I read the final third of the book, I will update this thread with a new post

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@Bermudan Option, thanks so much for the review! Glad to hear you enjoyed at least the first part of the book!

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