Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House
Any quick drive through Las Vegas makes it pretty clear who is rolling in the money – the Casinos!
Why do gamblers keep going back despite losing most of the time?
Misplaced hope, fantasies about the big win, promising themselves they will walk away when they are up and still winning, and probably the inability to calculate probabilities. These symptoms may sound familiar to new traders who have lost money in the stock market, especially when we were new to trading and had delusions of grandeur about trading their way to prosperity quickly and easily. In gambling there are really only two sides to choose to be on, either you are a gambler or you are the house. The gamblers have the long term odds stacked against them. The more they gamble, the more the odds are that they will inevitably lose. The casino has stacked the odds on their side over the long haul. The more the gambler keeps gambling, the more the odds shift in favor of the casino operator. The more they gamble the greater the chance the gambler will leave empty-handed.
Profitable traders operate like casinos, with the odds in their favor over the long term. They have learned to trade with historically, back-tested trading systems that put the odds on their side. Much like casino operators, they risk small amounts of equity per trade (around 1% – 2% of their accounts), so no one trade can hurt them financially and mentally for that matter. Most unseasoned traders behave like gamblers, with no real advantage. They plunge large bets on stocks so haphazardly that they just have a 50-50 shot like a roulette wheel – red or black. Many times these traders hurt themselves even worse by buying into the market in a downtrend and shorting into a rally, believing that they can pick the bottom or top.
Some new traders would love to have a 50/50 win ratio, many actually to all the wrong things and are no where near a 50% win rate. New traders often have no concept of risk management and like gamblers they eventual give back all their winnings and then some.
We do this by not being emotionally invested in any one trading outcome. It shows traders the supreme importance of risk management and a positive expectancy model. Traders must control risk and manage odds in the same fashion that casinos do. Casinos set table limits so as not to expose themselves to the risk of ruin by allowing a gambler to hurt the casino’s bottom line on any one huge bet. Traders must have the discipline to stick with positive expectancy models and risk management. Casinos do not get upset and change their rules trying to win back money from a gambler who goes on a lucky streak, as they know luck eventually runs out. Traders should never go off their trading plan to try to win back money quickly that they lost . Luck is what gamblers hope for while good traders are trading for a positive expectancy. Successful traders and casino operators consistently play the probabilities and manage risk so should you if you want to win. Trade the market – not the money involved in your account. Each trade must be based on a proven trading system of entries and exits and not by how much we hope to make. Never let failed trades in the past force you to revenge trade and and do not anticipate a signal. Let the market come to you and take it only when it is hit, utilizing rigid discipline. Winning traders always stick with their historically proven trading system. Casinos do not close down if gamblers get on a winning streak because they have calculated the odds and play based on those odds. Trading Like a Casino is truly a great book with a great analogy to explain how to win the trading game. The principles the book explains to use for winning in the markets are spot on and are easy to understand when associated with what many readers should be familiar with:casinos and how they take our money. If we can’t beat them, let’s join them, be the casino not the gambler.