WALL STREET — BETTER ODDS THAN A CASINO

A radio ad a while back caught my attention. It called the markets the Wall Street Casino. It made me laugh and was right on target. It missed just one thing: Wall Street’s odds are way better!

At the time, I was on active duty in the Army and playing black jack after work hours. I figured if I was going to play, I ought to learn the game.

The first book on trading I ever read was by Edward Thorp. The book was called “Beat the Dealer.” Thorp was previously working at MIT and published the ground-breaking research, A favorable strategy for twenty-one, in 1961. By using a computer, he calculated how one could, by counting cards, gain an advantage on the house.

By assigning a numerical value for each card, a player could identify when the odds were in his or her favor. A greater likelihood of tens or aces coming up was good for the player, and lower cards favored the house. Smart players now had the advantage on the house and could simply enter larger bets when the count was in their favor. Thorp later wrote “Beat the Market” advocating, again, his probability theory. By some accounts, including author of the Market Wizard series, Jack Schwager, Thorp is considered the greatest trader of all time.

Sometime later, a professional advantage player (card counter) named Stanford Wong developed a system where he would simply count the cards standing behind the active players at the Blackjack table. When the count was in his favor, he jumped in the middle of the shuffle and placed a sizable bet. He could skip all the bad count hands and simply bet bigly when he had the advantage.

Wonging in became rampant with huge wins. The casinos and their excessive greed caught on to the act and countered with a “No Mid-Shoe Entry” placard at every table along with maximum bet limits. The only way you could play was to stay in a shoe of cards from the first card dealt. “Wonging in” was dead. One would have to suffer through all the lousy cards and wait on the good probability hands.

Exceptional traders know that trading is a probabilities game. When a trader gets an edge or an indication of a higher probability of one thing happening over another, he can Wong in. The good news is the markets allow Wonging in. The bad news is you must have the discipline to sit on your hands and not trade when you have no advantage.

There is absolutely no reason to trade when you have no advantage. I can assure you that a professional blackjack player can take a bundle from a casino. He can’t guarantee a win, but he can up his bet enough when the odds are in his favor to turn the table on a casino. Casinos hate advantage players and actively harass them and chase them out of their gambling parlors. Nevada has even passed a law to make it a misdemeanor crime to count cards. “Stop using your brain and have fun,”they say.

There is absolutely no reason to trade when you have no advantage.

Stephen herto

But Wall Street allows any trader to play and trade only when they choose to do so. While your broker platform wants you to trade frequently, you are not obligated to do so. Over-trading is one of the worst things a trader can do. Boredom often coerces one into a trade when he or she has no advantage. This can and does wreck traders’ bankrolls.

What type of advantage are we talking about here? Perhaps you have a runaway stock and are playing the reversion to the mean trade. How about a volatility squeeze breakout, a bounce off a trending moving average, a move into earning season after a pullback, or a bear market rally with a stock that has a high short interest? By disciplining yourself to only trade when you have an advantage you know well, you will save yourself from a lot of misery, and perhaps learn to turn the tables on Wall Street.

Enuf said.