Submitted by: Jay DeVincentis

Traders can learn a lot from professional gamblers

Black Jack Anyone?

As a trading coach, I spend a lot of time sitting down with traders going through every aspect of their trading to identify areas to help them. The first part of my analysis is to get a back ground and determine where they are on their educational curve.

Trading is a life long learning process. But the bulk of the learning is done in the first few years. In a few questions, I can determine your trading blueprint, figure out where you are along the process and more importantly, where the holes are and how to fill them.

I have clients on both ends of the spectrum. And have found the following issues as roadblocks to their success.

1)Trading too little money per position. Not allocating an appropriate amount of money means that your commissions will become a drag to your potential. Its difficult to be a short term swing trader and lose 5% on commissions alone, especially when youre targeting 10-15% short term returns.

2)Not properly identifying the trade parameters. Trading is as basic as identifying an entry point, a reason for entering there, a stop price (incase youre wrong) and a profit target (in case youre right). This is a starting point. If you cant do this, I cant get you to the next level where we develop each of these components of the trade.

3)Not analyzing your own trades enough. When you give me a list of your trades, the first thing I do is calculate the success rate and the amount of profit your making when youre right and the amount of losses you take when youre wrong (Thats the P:L Ratio). Its important for me to know if youre at a 20% success rate. Then I have to figure out why. Actually, you can be successful at 20% as long as your P:L ratio is good and thats the second component that I look at. The P:L ratio should ideally be 3:1. Ive seen it go down to 2:1 for ETF traders which works as you can trade ETFs with a higher success rate and put more money in ETFs to account for decrease in volatility.

4)Trade to trade well, not to make money. All too often, clients main focus is making money. This, unfortunately, leads them away from what they should really focus on learning how to trade well. Forget about the money. Just learn to trade. Learn everything you can about trading. Execute your trading plans accordingly. Trade well, and the money will follow. Trade to make money, and youre bound to fail.

Item # 3 brings me to the topic for today. Think of trade in terms of units. The units Im talking here are profit units and stop loss units. I can not place enough emphasis on the 3:1 Profit/Loss ratio. It is the basis for establishing a successful trading plan, whether or not youre a swing trader, break out trader, candle trader, or any type of trader.

How do you utilize the 3:1 ratio? Its very simple. First, you have to identify an entry point. This depends on how you trade. Since there are so many different styles of trading, we wont talk about that here. The second, but actually more important component is the profit objective. Where do you think the stock is going to go? Subtract your target from your entry and you have the profit potential. Divide the profit potential by 3, and thats your Loss potential. You take that number, subtract it from your entry point and thats where your stop needs to be.

General rule of thumb in stock trading, you shouldnt give up much more than 9% as your stop when youre targeting 30% gains. Above that level, and youre going to make it difficult to recover depending on the % winners you achieve.

For example, if you sustain a 10% loss, it only takes an 11% gain to break even. If you sustain a 20% loss, it requires a 25% gain just to break even. And if you sustain a 50% loss, they it will require you to sustain a 100% gain, JUST TO BREAK EVEN. Not likely.

Percentage Gain To Break Even After A Loss

Percentage Gain Required

LossTo Break Even

– 10%11%

– 20%25%

– 33%50%

– 50%100%

– 75%300%

– 90%900%

Traders can learn a lot from professional gamblers. Gamblers, the profitable professional ones that do it for a living, not the weekend warriors, employ a similar money management strategy. Go to the table with their 1x units and look to gain 2-3x units. Once they gain their 3x units, they walk away with the profits. Or adjust their stop to protect their profits.

Think of it this way. If you go to a $10 black jack table, and bring $100 then youll have 10 units and the goal of making 30 units. Its like bringing 250 to a $25 dollar minimum table and looking to walk away with $750.

Gamblers, like traders, know losing is part of the game. They know there will be times when the cards work for them and against them. If youve ever gambled, you know the wins and losses come like a sine wave, where youll catch a wave of winning and then go on a string of losses.

Thinking in units also allows the gambler to remove the emotional attachment to money, and will make it easier to move from a $10 table, to a $25 dollar minimum table. Think of the chips in terms of units and follow your strategy. And at the end of the day, if youre up 30 units, you simply go cash them in and collect your $300 or your $750. Losing the emotional attachment allows you to follow your system better.

Gamblers also employ a time stop. You can only gamble for so long, and if you havent stopped out and havent hit your target, you eventually have to leave the table. Traders should also consider the same thing. If your money is sitting in a position and its not doing anything, then eventually, you have to consider exiting the position and put the money to better use elsewhere.

The stop units also have to be wide enough to allow for the normal number of losses youll experience playing black jack. If you bring 4 chips to the table, you can easily lose your 4 chips in 4 to 6 hands in a normal cycle. Go to the table with 10 chips, and you have some room to go through a down cycle and recover.

Same thing applies with your stock trades. If youre trying to gain 30%, you cant put a stop 2% below your entry point. Otherwise, youre bound to get stopped out so frequently, that you will never realize your target gains.

So there you have it. You can learn a lot from other traders and other professions like gambling. Elements of the two professions can go hand in hand and if youre a trader, it would actually benefit you to learn a little about gambling and if youre a gambler, you may find yourself well suited for trading in the stock market.

Black Jack anyone?

So Im heading to Vegas and Im thinking about playing Black Jack Sure I know how to play. But not really sure I know how to play from a gambling point of view. So I seek out any information I can.

Thats just my personality, I cant do something without learning almost everything I can before I even try. Im not going to jump on a table and think I know how to play. That would be foolish. (I wouldnt do it in trading as well)

Its something I learned early on in life. Theres no need to reinvent the wheel. Almost anything you want to do has been done before and there is information out there on how to do it correctly.

So I jump on the internet and filter through the hundreds of sites designed to sell you their methodology and find a few sites that give away the information for free. Without getting into the details, basically you play your hand based on your hand and more importantly, what the dealer has. Theres a decision grid, depending on whether youre playing a single deck or a multi deck table. You pretty much have to memorize it.

Fortunately, my friend Paul, whose birthday were out there celebrating in the first place, brought a book on Black Jack. So I read the book at the pool before we begin to gamble.

What was most interesting to me (and something Ive written about at length) was that the book described gambling just as I would describe trading. You go to the table with a limited amount of money that you can afford to lose. If you lose it, youre done and you walk away for the day. Also, like a profit target on a stock trade, you also walk away with a certain amount of winnings.

Interesting thought to treat gambling as you would in trading and have a stop price (the amount you go to the table with), have an entry price figuring which hands to hit, stay, double down, etc., and then having a profit target so you walk away with your winnings instead of doing what many do get greedy and lose all their profits

So howd the Vegas trip go? Other than the stuff that happened in Vegas that stayed in Vegas, the gambling went well. The first day, I was down quite a bit and close to my stop level. But I managed to claw my way back to just above break even.

The second day was my big winning day. In fact, I won enough to cover my gambling for another day. So the third day I went to the table with some of my profits and the goal to just enjoy myself. I may have lost a few dollars, but I had a great time at the table, I made a few friends and had a few drinks.

Ok, I dont recommend drinking with trading (or gambling for that matter if you want to do it right). So its a good thing the market isnt open at night Well, the stock market at least, theres always the futures market.

About the Author: Jay DeVincentis is President of

Investment research Group, Inc.

and founder of

stockbarometer.com, a financial newsletter advisory

. Jay has been advising his clients what stocks and options to buy and when for over 10 years. He is a market timer, a stock trader, a day trader and a stock investor who conducts

online stock trading courses.

Source:

isnare.com

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