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Anyone vaguely familiar with gambling knows that the house has the odds in its favor. Do some people leave a casino with big winnings? Yes, but that’s because they left before they lost it back to the casino. If they had won and then kept playing long enough, it is a mathematical certainty that they would lose it all back to the house. I once saw a program about a group of MIT students who had developed a system for beating the odds at blackjack. The program stated that they had won large amounts of money before they were all blacklisted by the casinos. The system they used involved waiting to make big bets only when the cards were in their favor.
This system works, it is called card counting, and others have used it to win at blackjack as well. By making minimal bets on almost every hand played, they controlled their losses. When the cards left in the deck were in their favor, they would make large bets and win most hands. During this winning streak, they would make up their losses and turn a profit. When a new deck of cards is brought to the table, they stop playing and take money back because with the introduction of a new deck of cards the odds swing back in the house’s favor.
If they had stayed for more hands, they would have slowly removed the chips from their winnings until they were gone. When trading, the house doesn’t exactly have odds, but the commissions and slips are actually very high against you. If you are new to trading, you are probably thinking that the commission and slippage are not such a big obstacle. Well, I followed it once in my account at the time I was day trading. After six months, I had lost more in commission and slippage than I had lost by losing trades. Also, keep in mind that I only traded an average of 3 times a day and made a profit 66% of the time. During those six months, I had only realized a 5.5% increase in my account balance.
That would be nice if I was trading a million-dollar account, but I wasn’t. At the time, I tried to fix my system, which ended in disaster because I started overtrading, which resulted in more lost trades than won trades. What I failed to realize was that my winning system didn’t need to be fixed, but my money management skills did. Later, when I realized that money management was the problem, I went back to my old system with some changes to the money management rules that I followed and executed much better. If you really want to become a better trader, focus on the money management side of your trading. Markets go up, markets go down, and on the side, you can’t control the market. We need to focus on the things we have control over, and money management strategies are a good place to start.
