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Blackjack and Trend Following Trading

Blackjack is the only gambling game that is not determined by chance alone. The shrewd player can influence the outcome by counting the cards and using a system. The fact that most casino visitors unconsciously aim at losing or play for the thrill creates chances for the rational gambler, the one who sits down at the blackjack table well-prepared and poised to win. The key is to have the odds on your side and bet properly. The same goes for trading. A former student of Richard Dennis once said:

When you are invested properly, money management is relatively simple. [We] adjust trading size for profits and losses using Richard Dennis’ model for volatility. No trader can control volatility completely, but you can improve your odds.

Improving those odds or getting at the probabilities is central to any trend following trading system. Pierre Simon knew and wrote about this concept in his book, Theorie Analytique des Probabilites, back in 1812:

It is remarkable that a science which began with the consideration of games of chance should have become the most important object of human knowledge. The most important questions of life are, for the most part, really only problems of probability.

What else do winning blackjack players and great trend followers have in common? More than you think:

  1. They are in business: Successful blackjack players and great traders pursue their goals as a business, not as a leisurely pursuit. From blackjack to trading, making serious money demands they get serious. As a result, the winners take a completely different approach towards betting from people who play for the action, the excitement and, of course, the dream of winning big.
  2. They keep records: People who are successful at either trading or gambling, keep detailed records. Keeping records builds confidence and discipline. You are keeping a journal of your decision-making of when, where, why and how much you bet on each trade or wager. The idea is to reach a comfort zone for yourself and stay within that zone whenever you are tempted to leave it, which will happen, we assure you. Keeping records is a part of managing your money, and if you are not disciplined in your money management, you are going to lose your entire bankroll.
  3. They are calm, cool and collected: To become even-tempered about money takes practice. You must force yourself to detach. You want to create an abstract money world where profits and losses are viewed in terms of abstract dollars. In this abstract world you don’t get excited about profits and you don’t get down about losses. You don’t want your emotions to go up and down with your account equity. If you can’t control greed, fear and hope — trading might not be for you.
  4. They are running a marathon: Successful gambling, like long-term trend following is a marathon. If you try to sprint, you’re going to lose the race. It’s just business.

The Downsides of Bad Gambling (and Trading)

The following questions are courtesy of The Massachusetts Department of Public Health. We could not help but see their relevance for the legions of losing day traders out there. Just replace the word gambling with trading:

  1. Have you often gambled longer than you had planned?
  2. Have you often gambled until your last dollar was gone?
  3. Have thoughts of gambling caused you to lose sleep?
  4. Have you used your income or savings to gamble while letting bills go unpaid?
  5. Have you made repeated, unsuccessful attempts to stop gambling?
  6. Have you broken the law or considered breaking the law to pay for your gambling?
  7. Have you borrowed money to pay for your gambling?
  8. Have you felt depressed or suicidal because of your gambling losses?
  9. Have you been remorseful after gambling?
  10. Have you ever gambled to get money to meet your financial obligations?

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