One of the Rose family activities we began during lockdown was a casino night. An old roulette wheel had been unearthed in the grandparent’s loft (no idea what the story is there), and this took centre stage on the kitchen table, while we gambled our chips in return for jelly beans.
Mrs R and I told ourselves it was fine to introduce the kids to gambling, as they were learning about maths and probability at the same time.
I found it interesting to see how my kids approached it.
The eldest instantly went for a martingale-type system, placing the same bet on black each time and doubling his stake when he lost.
The youngest was looking for patterns in how the ball fell, jumping from red to black to green trying to work out which way it would go each time.
The middle one was more cavalier and placed his bets by just randomly throwing his chips down.
The eldest cleaned up and ended the night with all the jelly beans.
While I’m never going to endorse his very risky martingale system, what really set my eldest’s method apart from his brother’s was a complete acceptance that there would be losses. That was built into the plan.
And that’s how casinos make money – they play the odds (having tipped them in their favour).
The casino doesn’t care if someone hits the jackpot on a slot machine, as long as the supply of punters keeps coming through the door.
Unlike gambling on roulette, where the odds are always against us, a trading strategy should tip the odds in our favour.
Then all we need to do is play like the casino – just keep repeating and let those odds play out for us.
Unsuccessful traders tend to focus on wanting to win every trade – this leaves them chasing profits, and ultimately losing money.
Successful traders, however, exploit the probabilities of the markets, confident that they’ll come out on top in the long-term.
In practice, this means we need two things …
Your trading strategy needs to give you an edge – this is the thing that tips the odds in your favour.
If you’re not sure how to measure your edge, the best way to do this is to look at your expectancy – you can find out more about what expectancy is and how to track it HERE.
The really great thing about an edge is that it really doesn’t need to be very big. Just a tiny edge on the market will nibble away profits for you day in, day out … which brings me to the second thing you need …
This is that ‘footfall’ that keeps bringing money into your ‘casino’. It requires staying power and perseverance, but it also requires funds. You can’t keep going if a losing streak knocks you out of the game.
Just because you have a measured edge in the market, doesn’t mean that you’ll have evenly spaced winners and losers, so your ability to keep on repeating depends on being able to weather a rough patch.
If you have concerns about this, the first thing to do is to reduce your risk per trade: it’s better to ensure you can keep repeating with a smaller profit margin than to risk wiping out. This will automatically reduce the volatility of your returns.
You can also explore other ways to reduce volatility – you can find my top 5 HERE.
Oh, and finally, to keep that casino running profitably, I recommend reinvesting your winnings rather than dipping your hand into the honey pot too much!
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