I’ve just spent the last 5 days in Las Vegas; my first time there. Wow! What a place. I was immediately impressed with the sheer size of it all, especially casino complexes like Caesars Palace and the MGM Grand. While the main reason for the trip was purely for pleasure I couldn’t help but draw a few comparisons between trading the markets and playing the tables. I’m sure we’ve all done this before but here are a few thoughts I had. I’d love to hear any thoughts any of you have ever had on the subject!
The House always wins in Vegas. That was pretty obvious from the size and scale of things, and the money that had been spent. We were staying at the Ballagio and it was clear that they weren’t making their money on the “all you can eat” buffet breakfast, not with the amount of food that some people had piled onto their plates, sometimes for several trips in a row!
The house in the case of trading is the Exchanges, or sometimes in the case of smaller punters, the Spread Bet/CFD firms. But the Exchanges can rightfully argue that they haven’t, as is the case in Vegas, invented an uneven playing field in which they will always come out on top. They are there to provide the playing field, which is “level” for short traders and long traders, all of whom simply pay commission and clearing fees. In other words they’re providing the hotel and gaming-room, but not taking money out of the trading.
It’s a widely know fact that spread bet firms (and CFD firms, which is maybe less widely conceived) do sometimes take the punters bet and don’t “lay it off”. They have structures and models in place to manage the risk they take on. I am going to write about this at further length some other time as it’s one of the most contentious issues in this arena, I feel, but it shouldn’t be: The retail customer, in the main, is not being ripped off by the Spread Bet firms. After all, it’s you that decides when you want to buy and sell something, and you’ve been told the parameters with which to do this way in advance, which is where there is a firm comparison with the Casinos.
The big casinos on the strip are merely there to serve people’s insatiable appetite to chase the dollar. They facilitate the dream. The fact that a quick look around you at any of these establishments should tell you straight away who’s winning out of the deal doesn’t put you off: You still fancy the idea of walking away one evening with pockets full of chips.
There are countless books on people who have beaten Vegas, mostly to do with counting Cards in Blackjack. I read such a book; based on a group of MIT students with exceptional mathematical brains who worked tirelessly to devise a system that told them when the deck was predominantly filled with high cards; a prime opportunity to bet large as the chances of scoring 19 or 20 and beating the house increased dramatically. One line that interested me in this particular tome was that you didn’t need to get consistently high cards to win; you had to get higher cards than the dealer.
The key word for me from the above paragraph is “system”. Obviously these guys were exceptionally bright, and the system was extremely complex, and even then it wasn’t guaranteed. But at least they had a system. I was amazed a few times while I was watching or playing the tables the number of people, particularly playing roulette, who were putting on too many chips per spin of the wheel for the venture to ever be profitable. They clearly didn’t understand the odds, and were doomed to fail on this basis. There’s a valuable lesson that can be translated to the markets; know your odds. Know your market. Have some sort of system.
This is where I think technical analysis always scores big. It can allow one to develop a systemised approach to decision making for traders. When you are developing a system consider the following: You need to find a way to enter trades, and then potentially have a different system for running a trade for maximum profit. There’s no point in developing a fantastic way of spotting entry points if it then fails to tell you when to get out.
Finally back to Vegas: I noticed more than anything that the gaming rooms were highly charged and highly emotive places, with people making and losing money all the time. This got me thinking about human emotion, and how this can have such a profound effect on decision making. I did it myself a few times: If I was on a losing run at Blackjack I’d simply put a bigger bet on because I needed to get out of the rut. Clearly this was an emotionally based decision, and clearly it was wrong (judging by the amount of times it failed!!!). So my final thought is this: Emotion is inevitable, whether you’re playing the markets or playing Craps. Your best chance of winning is by sticking to a system that reduces the emotion. I’ve seen many people write that technical analysis allows you to eliminate the emotion from trading. Rubbish. You cannot eliminate emotion, but you can find a way to manage it so it doesn’t take over and end up costing you chips… or is that ticks!!