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I see this discussion a billion times as traders talk about risk.
Many are referring to how much can be lost -- as in they have x amount at risk, which I think is perfectly fine and is important to know. ("My risk is $10.")
Some are referring to the probability of loss, not the amount -- as in, there is an x percent chance of loss. I think this is also fine, and also important to know. (My risk of losing is 25%.")
I always somewhat instinctively think and speak of "risk" in terms of probability, the odds or chance of loss. It seems odd when others don't mean this, but mean the amount they have put up, not the chance of winning/losing. But people do speak both ways, and I think it's more a semantic issue than anything else.
So, I would think about the roulette wheel in terms of the probability of winning for successive spins, as @SMCJB said. But someone else might be thinking about the ten bucks they put down on the spin, and say that this was their "risk." They are related statements, because they are about gaining or losing something, Both are valid, but different statements.
Seems that way to me, anyway.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
You could imply the probability of a loss by creating a distribution of the daily returns of the strategy/equity curve ?
Assuming option strategies were not allowed
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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That's what Value at Risk/VaR does. Can even include options although simpler models use a Taylor's expansion for the deltas which can be a little crude in larger moves.
Of course that's all historical and not forward looking.
It won't capture the risk of selling out of the money options and having a smooth equity curve during the time of the contest.
It's better for linear instruments.
The moment you introduce non-linearity/convex pay-offs....all bets are off....pun intended.
When I was talking about the World Cup of Trading I was referring to the WINNERS not the AVERAGE entrant. I would really like to do a survey of the winners and ask them how many times did they blow up their account trying to win. My guess is the number would be smaller than you think because the winners think differently than the ones who blow up account after account.
Also, in regards to my own trading, I thought I made it clear I'm not trying to achieve even the average return (200+%) but instead use some of the same concepts that made them successful but on a more reasonable risk level. I assess risk by taking into account the max I am willing to lose on one trade and making a mental note of a systems max drawdown to help me gauge position size. 1.5 times max drawdown seems like a natural quit point for any given system. Being a systems trader probability doesn't play a role for me once the system is traded live. It already has to pass stringent probability testing for me to even consider real money trading.
The key here is diversification!! Must Have Diversification to achieve good returns through the good times and the bad.
