Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House
Anyone who has driven down the strip in Las Vegas can tell who is rolling in the money – the Casinos! Why do gamblers keep going back, despite losing the majority of the time? A combination of misplaced hope, fantasies about the Big Win, promising themselves they will be able to walk away at will, and probably the inability to calculate probabilities. These symptoms are often shared by new traders who have lost money in the stock market, when visions of effortlessly trading their way to prosperity clouded their judgement.
In gambling there are only two sides; you are a either gambler, or you are the house. The gamblers have the long term odds stacked against them. The casino has stacked the odds against the gambler, and the more they risk, the greater the chance that they will leave empty-handed.
The book featured in this blog post explains the winning principles of trading by using the casino paradigm. 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.
Most unseasoned traders behave like gamblers. They bet on stocks so haphazardly that they have a 50-50 shot like a roulette wheel – red or black. Many times, these traders hurt themselves 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, because most don’t get that lucky.
New traders often have no concept of risk management, and like gamblers, they eventually give back all their winnings to the house. Richard Weissman’s book is about becoming the casino by using math and probabilities instead of emotions. By being psychologically disciplined and refusing to become invested in outcomes, traders will overcome emotional barriers to trading success. Casinos set table limits so a gambler cannot hurt their bottom line on any one bet. By understanding the importance of risk management and a positive expectancy model, traders will control their own odds.
Traders must have the discipline to stick with positive expectancy models. Casinos don’t panic and change their rules when a gambler goes on a winning streak, because they know luck eventually runs out. Traders should never go off their trading plan to try and win back money 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 in order to win.
Traders should trade the market – not the money involved in their account. Each trade must be based on a proven trading system of entries and exits, and not by how much money a trader hopes to make. Traders should follow the flow and let the market come to them, never letting failed trades from their past force them to revenge trade.
Winning traders always stick with their historically proven trading system. Casinos do not close down if gamblers go on a winning streak, because they have calculated the odds and play based on those odds. Trading Like a Casino is a great book with a great analogy to explain how to win at the trading game. The principles the book explains are spot on, and are easy to understand.
If we can’t beat them, let’s join them. Be the casino, not the gambler.