Be the casino – not the gambler

There are many different approaches to trading … perhaps you spend a lot of time checking up on the fundamentals, reading the financial press and company reports … perhaps you study technical analysis late into the night …

The cleverer we get with our trading, the more likely we are to forget one key fact – successful trading is about playing the probabilities.

The concept of playing the probabilities, or the odds, is one that sits uncomfortably with some traders – they feel that it makes them sound like gamblers.

In fact, it couldn’t be further from the truth.

If you have a firm grasp on the odds, you’re not the gambler – you’re the casino.

Las Vegas casinos make their money by maintaining an edge of around 4.5%. That means that out of every dollar that is brought into the casino, 4.5 cents stay there. Some people win big, some people lose their shirts, but on average, the casino makes 4.5%.

The casinos aren’t gambling – they are playing the odds.

They don’t care if someone hits the jackpot on a slot-machine. As long as people are coming in through the door – they’ll keep taking their 4.5%.

So, how do you apply this to your own trading?

You can’t read the future

However good your fundamental knowledge is, or how much you’ve studied your charts – you cannot know what the market is going to do next.

What you can do, however, is judge the likelihood of what the market will do next, and position your trades accordingly.

The market doesn’t care what you “think” – it’ll go ahead and do what it likes.

But if you’ve played your probabilities correctly – the outcome should be in your favour over the long-term.

Successful traders know how to exploit the probabilities of the markets, with the knowledge that in the long-term, they’ll come out on top.

Unsuccessful traders want to “win” every trade, and as a consequence end up chasing their tails.

Stabbing in the dark

Here’s an example I tried out on my six-year-old on one of the rare sunny days this summer …

“Will the weather tomorrow be the same as today?”

“Yes!” he announced with confidence.

The next day it rained. He was disheartened. “Perhaps sunny days and rainy days alternate.” he thought. “So, tomorrow will be sunny.”

It rained again.

Two bets down, he wasn’t going to be shaken. It’s mid-summer – the sun is going to shine.

It rained again.

My son’s problem is that instead of playing the probabilities, he is trying to predict what’s going to happen each day. Meteorologists have shown that the weather tomorrow will be the same as today in more than 50% of cases. He doesn’t realize that, if he plays the odds, he can win (not every day, but in the long term).

If he bets that every day will be the same as the previous day, he is accepting that some days he’ll get it wrong (the weather won’t always stay the same!) but the odds will win out for him. But if he tries to guess every day accurately, he’s likely to do a lot worse.

Stop trying to get it right

Trading requires exactly the same approach.

We need to find the way that will tip the odds in our favour. They don’t have to be far in our favour – just enough to give us that edge that will bring in a profit.

Once we know that the probabilities are on our side, all that remains is to repeat … repeat … repeat …

We need to stop worrying about what will happen “this time”. If you’ve found your edge – it really doesn’t matter if you win or lose “this” trade or “that” trade.

As traders, most of us strive to learn as much about the process as we can. But the more we delve into the process of finding successful trading signals, the easier it is to lose track of long-term probabilities.

Long-term probabilities are all that matter in your trading. Provided they are in your favour – you’ll always be ahead of the game.

Much of my trading life, I’ve endeavoured to find technical signals that will give me a more significant edge, and bigger profits, and every now and then I come across an incredibly simple trick that tips the odds in my favour.

These little tricks are like wormholes opening up into the financial markets. It feels great when it happens – like free money!

At the beginning of this year, I found just one of these “wormholes” on the Dow Jones Index. It’s not made me a fortune (yet!) but has been delivery some nice “free” pocket money on a regular basis.

I’m pretty excited about it – and I hope to share more details with you very soon.

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