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The pair is up 850 pips in the past four trading days
What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?
One possible definition might be “a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth.”
Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play.
A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.
Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.
“gamblers are willing losers who occasionally win”
That is, gamblers risk their capital on propositions where the odds are either: (more…)
Gambling is, usually, an event with:
- Limited duration
- Finite upside
- Finite downside
- Binary outcome
When you gamble you either win or lose. That event usually takes only a small amount of time.
For example, you can bet on a horserace 10 minutes before it starts and 5 minutes later you have a result. For anyone who plays poker, you know it may take a little bit more time as the stakes are raised. So poker is a little bit closer to trading.
In gambling your risk on any event is usually what you outlay. And your potential return is what the house is offering at the time you agree to the bet.
I love to play blackjack (and for some reason, while I don’t play often, I have been profitable almost every time I’ve played in the last 3 years) like one of my trading mentors who was an original Turtle Trader.
A bet on a Blackjack table can take a minute or two until it’s over. Whereas in trading, a trade has the following characteristics: (more…)
Just 52 cards (weeks) with 4 suits (seasons) with 13 cards (weeks) in each season can be shuffled into 400000000000000000000000000000000000000000000000000000000000000000000 combinations. That’s 4 and 69 0’s.
The Pips (spots on a card) = the number of days in the year for trivia buffs (jacks count 11, Queens 12 and Kings 13).
Oh and here is a mind-fuddling bit of math that I perform with all the time and I’m still shocked that it always works: The Gilbreath Shuffle.
“I think successful trading, or poker playing for that matter, involves speculating rather than gambling. Successful speculation implies taking risks when the odds are in your favor. Just like in poker, where you have to know which hands to bet on, in trading you have to know when the odds are in your favor.” – Sperandeo
It is interesting that Sperandeo makes a point to define the difference between speculating and gambling. He discusses how he never viewed playing poker to be gambling in the same respect that slot machines are gambling. In poker, he had the knowledge of which hands had the highest probability of winning and the option to only play the highest probability hands. This draws a direct correlation to trading. We know from our study of historical winners what qualities make up stocks that go on big runs and we have the option to only play those key stocks.
Looking at trading in this respect breaks it down into two important goals. We have to know which kinds of stocks have the best odds of going on huge runs. We also have to have the timing skills and the guts to play those stocks when we encounter them and the patience to sit on the sidelines when when there aren’t good options.
“Trading the market without knowing what stage it is in is like selling life insurance to twenty-year-olds and eighty-year-olds at the same premium.” – Sperandeo
Again here, we see Sperandeo drawing a real world comparison to stock trading. He discusses that you just as the odds would be better if you sell life insurance to a twenty-year-old compared to an eighty-year-old, the same can be said when trading a young trend compared to trading an extended trend. He doesn’t necessarily say you should trade a new trend or shouldn’t trade an extended trend, but that you should strongly factor that in to your timing decisions. (more…)
“gamblers are willing losers who occasionally win”
That is, gamblers risk their capital on propositions where the odds are either:
– unknown to them
– cannot be known
– which actual experience has shown to have negative expectation
– or which they know with mathematical precision to be negative
They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin. (more…)
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 theirway 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.
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 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. (more…)
Yes, the vast majority of traders are gamblers, maybe the majority of market participants are in fact gamblers. The traders that are gamblers trade with no plan and without understanding the odds are stacked against them. Whether it is buying far out of the money options with no method for profitability or randomly chasing stocks on a whim, gambling is when you risk money with the odds against you and have no edge. The losses of the gamblers is where the majority of the profits come from to the winning traders in the markets who have an edge.
Now the other side is the traders that consistently win by using an edge that gives them an advantage over the other traders. The winning traders are not trading against the casino they are trading against the gamblers. They have become the casino, like the casino they know the odds are in their favor and they will be profitable in the long run. Like the casino has table limits they have risk management to not over expose themselves to any one bet by the gamblers. The biggest problem that gamblers have is their emotions that cause them to always lose in the long term by placing bets based on feelings instead of the odds. The winning traders trade based on probabilities being in their favor and pick their trades carefully based on the best chances of success.
The casinos are built from the losses of the gamblers, the winning traders accounts are built on the gambling of the traders with no plan, no edge, and no risk management.