They operate in teams. It's taken them months and months of preparation to get to this point. They've drilled over and over again so that they won't crack under the pressure of the casino lights. The first member approaches the table. He looks to casually be placing small bets, yet he's really counting cards, getting ready to signal his partner at just the precise moment. Once the deck is favorable to their system, the second player will join the table. Now, with a hot deck, it is time to place the monster bets. While they can never predict the outcome of each individual hand, they know that by betting small when the odds are low, and large when the odds are favorable, in the long run, their system will yield large profits.
While I am not encouraging card counting or heading out to Vegas to play blackjack, this type of mindset can be extremely beneficial traders. If I were in a casino, I wouldn't play the slots. I'd be a card counter. This is how I think about my trading. I want to have a large "bet" on when the odds are in my favor and a small bet on when the odds are against me. So the million dollar question becomes how do with do this?
Go With The General Trend
First and foremost, never fight the general market trend. If the market is downtrending or in a deep bear market, why go long? If 75% of stocks move in the direction of the general market, what is the benefit of trying to be a hero who catches the lone stock heading higher? Is there really a benefit in looking for a stock that can rally 2% in a bear market? Put the wind and odds in your favor by going with the general market trend. It's best to be in cash while the trend is against you. Keep your exposure low until the market is in a strong uptrend.
Think about what the card counters do. They do not want to be placing large bets when the odds are against them. Why? Because mathematically, they are likely to lose money during these periods of time. When the market is correcting or in a bear market, what's the point in being fully invested? If the environment is not favorable, it's best to wait or trade lightly before increasing exposure.
Cutting Losses And Managing Risk Per Trade
Successful traders always cut losses. If I take a 7% loss on a trade, I still have the majority of my funds left to make another trade. Even if I took two 7% losses in a row and then one 25% gain, I would still be profitable. This is exactly what card counters do. They take a bunch of small losses while the deck is cold, but they still come out ahead because they have large wins that pay for their many small losses.
How would it work out for the card counters if they blindly bet all their money on the first hand of blackjack? It just does not make any sense to place a large amount of your capital on one hand. It is the same with the stock market. While you could never predict the outcome of any particular hand or trade, in the long-run, you will be profitable if you have a system of small losers and big winners. Because you cannot predict any one particular bet or trade, you should never risk more than one percent of your account on any trade. This drastically reduces the risk of ruin.
Even when the card counters think the deck is hot, they never go all in. Sure, they may call in player two who is the larger better, but they never place their entire stake on one hand. To do so would be too risky. Instead, they increase their bet while at the same time never allowing themselves to be at the mercy of one bad hand. The key is long-term profitability by playing an edge over and over again when the odds are in your favor. The outcome of one particular hand should never be relevant. You can download this free excel to help you manage the risk on each trade.
Have A Sound System For When To Buy
The card counters in Vegas wouldn't make any money if their system told them to hit on 20 or to stand on 10. There are certain rules that must be obeyed while playing blackjack. For traders, this translate to having proper entry points. If you make it a habit of buying stocks that are 250% above their 200-day moving average or 15% above the logical pivot point, it's just not going to work. Without an appropriate strategy, you will not be successful. Buying extended is a great example of poor money management. You are putting yourself in a position where a stock is likely to run against you and thus putting your money in a situation where it is likely to be lost. Remember, technical analysis will never allow you to predict the future on a consistent basis. However, it can be used to help determine low-risk, high-reward entry points and when a stock should not be purchased as it is likely due for a reaction. In addition, technical analysis can be beneficial in identifying setups where edges exist. For instance, studying a particular charting pattern and its' price action and volume, can help you identify a situation where the odds are in your favor.
Varying Position Sizing
Just like the blackjack players had small bets on with a cold deck and large bets on when the deck was hot, traders can do they same. An example of this would be pyramiding. If a stock is working, you can look for another entry point to add onto it. Sometimes, I'll buy half a position in the morning and another half later in the day. Other times, I may wait for another set up before adding to my position. This allows me own a larger position in a stock that has already shown itself to be working.
Pyramiding also allows me to use the market as a feedback system. If my first buy shows me a loss, why should I add more shares? If the deck was cold, the blackjack team would not begin their larger bets. The same applies to trading.
Percent of Account Invested
Another way you can trade like a card counter is to commit to investing a smaller percentage of your portfolio if the market is choppy or uncooperative. For instance, if you have not been trading well, it's a good idea to commit to leaving 50-85% of your account in cash. Once you start making progress, you can slowly add more positions. Just as the blackjack players wait for a hot deck before adding on large bets, traders must wait for a bull market before taking on more positions. I like to take small probing trades to get a sense of the market as it starts to turn. Then, when I'm gaining traction, I can move to being fully invested or even onto margin.
The key is you never want to go zero to 120% invested. I did this in the days of my ignorance and paid a heavy price. My account would be up 2%, I'd be as bullish as a human could be and would go all in with margin and two days later would find myself back in cash licking my wounds. This is a fool's game. Let the market show you which way it wants to go.
Varying your position size can also help if you yourself are trading poorly. I've heard of traders who lost major amounts of money during bull markets. Maybe they were getting divorced. Maybe a parent was ill. Maybe they had an issue with one of their children. The key is that they were not trading well. Rather than digging in and trying to make it all back, it's best to scale back until you can identify what's going on.
While often ignored, money management can be a huge factor in trading profitability. In my course "Strategic Swing Trading," I have a section entitled, "Become A Casino: Expectancy, Probabilities, and Trading" where I delve into this topic in further detail. By waiting for a "hot" market before your are fully invested, you gain an invaluable edge. Having the ability to wait and even walk away from the table when the odds are against you, can literally make your year. It's an important concept to understand when you are in Vegas, and while you are trading.
Risk right. Sit tight.
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