Last week I spent 2 days at
Caesars Palace in Las Vegas, giving a
couple lectures
at the Money Show. Most people do not like to mix the
words trading and
gambling. For many, this somehow gives the impression
that trading is like some secret
poker game in someone’s basement, a
dark alley game of dice, or weekend trip to Las Vegas. While these three
examples may not sound glamorous, they all share the important aspects
of trading. Whether you are playing a poker game for money, trading one
of the various markets we trade, or
Pepsi buying commercial time on
television, money is being put at risk with the intention of a desirable
return on that investment. In any of these examples, there is no
certainty, there is only the opportunity for better odds and the astute
trader (market
speculator) knows this. Even Pepsi does not know what
kind of return they will get when they buy commercial time on a network.
They have an idea but they never know the exact return, it is a gamble.
You see, when you keep it real and understand that trading is
gambling, you will then understand that it is the ultimate form of
gambling. It happens to be the type of gambling where we the trader can
STACK the odds in our favor, much better than you can in Vegas or even
the casino for that matter. Imagine you are playing a card game in Vegas
only this time, you can decide whether you want to put your money down
on the table AFTER you see your cards and the dealer’s cards and also
bet as much money as you like on this hand. That’s trading my friends
and that’s why it is the premier form of speculating on the planet. I
have a friend who always tells me that the trading I do is just gambling
and I tell him he is right only that it happens to be the type of
gambling where you can absolutely stack the odds in your favor. Caesars
Palace, Mandalay bay, and the others don’t enjoy the odds we are able to
attain in trading. The key is to follow your plan just like Vegas does
and keep the losses small and the gains larger.
Trading with objective
supply and demand analysis, we have the
ability to clearly determine probability, risk, and reward and only put
my money at risk when the odds are stacked in our favor. Here is an
example:
When to sell:
A rally in price to supply (retail)
Odds enhancer:
1) Properly located on the larger time frame supply / demand curve
2) With a substantial profit margin of at least 3:1 (reward/risk)
3) A quality supply level
a. Song decline in price from supply suggesting a big supply/demand imbalance
b. A supply level that has not been retested yet which offers the greatest odds
4) Is the rally in price to supply a stair step rally suggesting
a low odds sell or is the rally a strong rally in price to supply
suggesting a much higher odds selling opportunity
Each odds enhancer increases the probability of your potential bet
(and there are more quality odds enhancers). After objectively assessing
your odds based on the setup you see on your chart, you can then decide
how much of your capital you want to risk on the trade (bet). Vegas
would LOVE to have these odds but they don’t come close. The one thing
Vegas does however that brings them consistent riches is that they don’t
change their rules when they lose. They know they are going to lose
money every day but at the end of the day, they almost always come out
ahead with profits. They have a system that tilts the odds in their
favor so they know that all they have to do is stick to the plan and
they will profit. Imagine if they became emotional and changed the rules
each time they lost. If they did that, they would not enjoy the profits
that they do.
Let’s take a look at a trade from last week I was able to take from
our supply/demand grid. The grid identified an objective supply level
(black box). This supply had a few key Odds Enhancers suggesting a low
risk, high reward, and high probability selling opportunity when price
rallied back to that level. A short time later, price rallied to that
level meaning someone was buying at that supply level. This is where the
trade (bet, gamble, speculation) takes place. The buyer is betting that
price will rise and the seller is betting that price will decline. Call
it a trade, bet, or whatever, they are all exactly the same thing. As
the seller, we know the odds are stacked in our favor, obviously the
buyer doesn’t or they would not be buying at that supply level. By being
very disciplined in our strategy rules and Odds Enhancers, we are
essentially doing the same thing as Vegas. The key for us is to not
change any rules and don’t think.
Income Trade Nov. 19, 2013
Price declined strong off that level which meant profits for the
seller and losses for the buyer, this is what makes a market (and a
casino).
With the ability you have in trading markets, make sure you have a
set of rules that stack the odds in your favor. If you don’t have that
set of rules, don’t trade because you are competing with traders who do
and you will very likely lose. Once you have that set of objective and
mechanical rules that help stack the odds in your favor, make sure you
stick to it and understand you will still have losses sometimes but
that’s ok, think of the casino and all the times they lose in a day.
Remember, in trading, gambling, speculating or whatever you chose to
call it, the one thing that is certain is the lack of 100% certainty
with each individual outcome. Instead of searching for certainty, become
a part of the astute trading community that only searches for better
odds. And lastly, understand that trading, like gambling is certainly
not for everyone.
Hope this was helpful, have a great day.
Sam Seiden –
sseiden@tradingacademy.com
