Trade Like a Casino House

Any quick drive through Goa Casino makes it pretty clear who is making 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 nowhere 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. Richard Weismann’s book is about becoming the casino through trading using math and probabilities,  instead of emotions. 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 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.

Traders Mindset

No trader wins on every trade... The best traders in the world only have a 50%-80% success rate

Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich

Consistent 15% – 20% annual returns are what world class traders and portfolio managers make

Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy

Market conditions will have a huge impact on your returns each year, regardless of how you trade

The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns

If you risk 5% to 10% of your trading capital on every trade, your risk of ruin is 100% in the short to long term... If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful

To trade for a living, you likely need a multiple six figure account and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress

Trading is a profession like any other and requires the same level of discipline and dedication to be successful

All your profits comes from other trader’s losses. You must beat other traders to be profitable

Trading is the hardest easy money you will ever make

Trading Stress and Emotion

*Everyone has a stop-loss level: For some, it’s a price; for others, it’s a pain threshold.

* It’s not stress and emotion that get in the way of trading; it’s the stress and emotion that results when trading becomes personal: about you, rather than about supply and demand.

* The measure of a trader is how hard he or she works when markets are closed.

* Much bad trading is hormonal: too much testosterone, too little.

* When traders don’t track their results, it’s because they don’t want to know them.

* The best traders have a passion for markets; the worst have a passion for trading.

* When it comes to market history, there are only two choices: trading with awareness of it, trading in ignorance of it.

* Losing a job or not wanting a 9-to-5 one is not the right reason to pursue trading.

* Markets tend to move in the direction of the greatest number of stops.

* The best traders are not relaxed *and* they are not anxious. They are alert.

* Deep down, traders who don’t prepare don’t feel they deserve to win. We always gravitate toward our just desserts.