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Yes, Give it to me

How To Trade Like A Casino 

Last Updated: October 28, 2020

By Rayner

If you ever wondered how a casino 鈥減rints money鈥 consistently, then this post is for you.

You鈥檒l discover:

Cool?

Then let鈥檚 get started鈥

The most powerful thing a casino has at its disposal

Imagine:

There鈥檚 a special coin in your hands.

Every time it comes up heads, you win $2. And every time it comes up tails, I win $1.

Now in the long run, who will win?

You, of course! 威客电竞竞猜 you have a mathematical edge over me.

And it doesn鈥檛 matter whether you鈥檙e gambling at a casino, betting on horses, or trading the financial markets.

If you want to make money from speculation, you must have an edge over the other players (or the house).

But what about risk management and trading psychology?

It matters, but not as much as you think.

威客电竞竞猜 without an edge in the markets, even the best risk management or trading psychology won鈥檛 save your account.

And this brings me to my next point鈥

You must know your numbers (it鈥檚 so easy that even a 10-year old can compute it)

Now, your edge can be expressed using this formula鈥

(Average gain x winning rate) 鈥 (Average loss x losing rate) 鈥 Transaction cost

And if you get a positive number, it means you have an edge in the markets (otherwise known as a positive expectancy).

Here鈥檚 an example, let鈥檚 say you have a trading system with the following metrics鈥

  • Winning rate = 60%
  • Losing rate = 40%
  • Average gain = $500
  • Average loss = $400
  • Transaction cost = $10

So, plug in the numbers into the formula and you get鈥

(500 * 0.6) 鈥 (400 * 0.4) 鈥 $10 = $130

In other words, you can expect to make an average of $130 per trade (in the long run).

Does it make sense?

Great!

威客电竞竞猜 once you have a well-defined edge, it puts you ahead of 99% of retail traders 鈥 and that gives you the confidence to take things to the next level.

Why Warren Buffet can never bankrupt a casino (even if he wants to)

Warren Buffet, the greatest investor of all time, is worth USD 67.7 billion (as of this writing).

Now, let鈥檚 assume that Warren Buffet has turned evil and wants to bankrupt all casinos.

He plans to play Blackjack with the casinos and bet $5 billion on each hand. If he wins, he can easily bankrupt all casinos.

But that will never happen.

Why?

威客电竞竞猜 every casino in the world has a table limit. This means there鈥檚 a maximum amount to how much a player can wager on every bet.

You鈥檙e probably thinking:

鈥淚sn鈥檛 it better to let the players bet as much as they want since the house has an edge over the players?鈥

Yes, in the long run, the house always wins. But, in the short run, anything can happen (it鈥檚 not surprising to see a casino lose 5, 10, or 20 bets in a row).

That鈥檚 why every casino sets a table limit to how much a player can bet. That鈥檚 their risk management put in place so that a losing streak will not end their business.

And this is the same for trading!

You must manage your risk like a casino so that even a losing streak doesn鈥檛 blow up your trading account.

The secret to generating consistent profits like a casino

Here鈥檚 the thing:

Every casino in the world has an edge over the players.

But, why are some casinos more profitable than others? And why do some casinos even go bankrupt?

On the surface, it seems like all you need is a statistical advantage over the players for you to mint money.

But, that鈥檚 only one small part of the equation.

You must also figure out how to鈥

  • Attract new customers from competitors
  • Retain existing customers
  • Incentivize customers to spend more
  • Keep your customers happy
  • Etc.

Clearly, there are a lot of moving parts and one person can鈥檛 manage everything.

So, how does a casino do it?

The secret is this鈥

A casino has systems for everything they do.

For example:

#1: A casino has a system in place to incentivize their best customers to come back often by offering perks like free accommodations, transport, etc.

#2: All dealers follow a systematic way of playing Blackjack so the casino can consistently increase their revenue (and not leave it to the discretion of a dealer).

Now you might not be running a casino but, you鈥檙e managing your own trading business.

So, how do you manage it like a casino?

Well, you must have systems in place.

For example鈥

Risk management to ensure you don鈥檛 lose everything on a single trade.

Source of funds so you can pump in more money to your account and scale up your trading business.

Trading strategy so you have a fixed approach to enter & exit your trades 鈥 which improves your consistency.

Research & development so you can build new trading strategies and profit in different market conditions.

In other words, if you want a sustainable trading business that generates consistent profits, then you must have systems in place so your actions are consistent.

How casinos adapt to changing market conditions

Back in the 80s, it was easy to make money as a casino because there鈥檚 little to no competition.

Then, competition stepped in as more casinos entered the business. And the players got 鈥渟marter鈥.

At this point, market conditions have changed.

And if a casino refuses to adapt to changing market conditions, it鈥檒l go out of business.

So what happened?

Casinos 鈥渓evelled-up鈥 and offered better services 鈥 free accommodation, free transport, VIP treatment, etc. Those that didn鈥檛 adapt went out of business.

And this is the same for trading.

Market conditions change and you must adapt to it.

For example鈥

If your trading strategy only makes money in an uptrend, then do you have a plan when it goes into a bear market?

If your trading strategy only makes money in a range market, then what happens when it breaks out and starts trending?

Pro Tip:

Before you trade any strategy, backtest it to make sure it can survive different market conditions (like uptrend, downtrend, recession, etc.)

This gives you confidence that your trading strategy is robust and able to withstand different market conditions.

Anticipate the worst and prepare for it, here鈥檚 how鈥

According to a study by Cesilla Horv谩th and Richard Paap, they found that casinos鈥 revenue was correlated with economic growth.

This means during a recession, a casino鈥檚 business will be negatively affected as fewer people visit the casinos.

So, what do they do?

Well, they could鈥

Reduce the number of staff to reduce their expense since they have fewer customers to serve.

Offer free rooms to attract customers back to the gambling tables so they can increase their revenue.

Improve the efficiency of their operation so they can lower expense and still maintain or even increase revenue.

Now if a casino can anticipate the worst and have contingency plans ready, they are likely to survive whatever comes their way.

Now what about your trading business, do you have contingency plans for it?

Here are some real issues you must consider鈥

  • If you鈥檙e in a losing streak, can you still meet your day to day expenses?
  • What if your broker goes belly up, how will that affect you?
  • If your trading system goes into a drawdown, how do you know if you should continue trading it or stop altogether?
  • If the markets suddenly collapse 10%, can you survive?

If you can answer these questions, then you have a sound trading business.

Conclusion

So here鈥檚 what you鈥檝e learned today:

  • Just like a casino, you must have an edge in the markets or else even having the best risk management can鈥檛 save you
  • Once you have an edge, then your risk management comes into play because you don鈥檛 want to blow up your account over a few losing trades
  • If you want to grow and scale your trading business, you must have systems in place (e.g. to source for new funds, research new strategies, etc.)
  • The markets are always changing so be willing to adapt accordingly (or risk going out of business)
  • Always be prepared for the worst scenarios (like broker going bankrupt, losing streaks, etc.) so you can make contingency plans to overcome them

Now over to you鈥

How else can you trade like a casino?

Leave a comment below and share your thoughts with me.

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