Trading Lesson of the Week

Check back weekly for another free trading lesson:

Do You Gamble or Trade?

In This Week’s Issue:

  • Stockscores’ Market Minutes Video – Trading Price Volatility
  • Stockscores Trader Training – Do You Trade or Do You Gamble?
  • Stock Features of the Week – In Search of Alpha

 

Stockscores Market Minutes – Trading Price Volatility

Traders should understand how to recognize the difference between high and low price volatility and how to trade around it. This week, I show a simple method for measuring price volatility as well as my weekly market analysis and the trade of the week on UPS. Click here to watch.

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Trader Training – Do You Trade or Do You Gamble

Many people think that trading the stock market is a form of gambling, making the markets of the world not much more than giant electronic casinos. For many who trade the market, gambling is exactly what they are doing. For others, trading is not gambling and this week I want to outline what makes the difference.

First, let's define what gambling is. Simply, it is wagering money on a bet that has a negative expected value. That means that a rational person who understands the odds of the bet should expect to get less back than they put in. Yes, a gambler might get lucky and get far more back than the math would predict but placing these bets many times will lead to losses.

To avoid being a gambler, the trader must make trades that have a positive expected value. Let me explain by looking at a well-known casino game, Blackjack.

The object of Blackjack is to amass cards that add up to 21 without going over with the hope that your total is greater than that of the dealer. The player who has a King of Hearts and a 10 has a score of 20 and beats the dealer if she has a pair of nines, adding up to 18. I am sure you already know how the game works and I expect that most of you know that in Blackjack, like any casino game, the odds favor the house. That means that a casino that deals thousands of hands of Blackjack can expect to win. They won't win every hand, just the majority over a large number of hands.

Therefore, Blackjack is a gamble because the expected value of playing the game is negative. There are, however, ways to take the gamble out of Blackjack, some legal according to the rules of the game and others not.

If the dealer is showing a six and you the player have a six and a five, it is not a gamble to "Double Down" by doubling your bet and only taking one more card. The odds of you winning are in your favor in this scenario because the six that the dealer holds is a bad card and the 11 that you currently have has a good chance of turning in to a 21 if you draw a card that has a value of 10. Doubling down on 11 has a positive expected value as long as the dealer is not showing an Ace.

So, within a gambling game like Blackjack there are scenarios where the odds favor making a bigger bet without breaking the rules. Some Blackjack players have learned how to break the rules of the game and put the odds in their favor, the most common way is to count cards.

A card counter keeps track of the number of face and small number cards that remain in the deck by counting those that have been dealt. When a remaining deck is heavy with high value cards, the odds of the player beating the dealer goes up enough to favor the player, making the game one where the expected value of making a bet is positive. At this point, the game is no longer a gamble because the player should make money, unless they suffer from bad luck. This differs from the gambler who relies on good luck to win.

Let's bring this concept back to trading. Do you know the expected value of the trades you make in the market? To really understand what your odds of making a profit, and the expected size of that profit, requires establishing a set of rules and testing those rules over a large number of trades so you can determine the expected value of your strategy rules.

You may establish that you want to buy any stock that a PE Ratio of less than 70% of the industry average. Sounds like a good idea, but is it? Only testing that rule over many trading examples and market conditions can really tell you if this simple approach to the market is an effective one.

Strategies do not have to be complicated by they do need to be well tested. If you approach the market without a set of trading rules and an understanding of the expected value of your trading approach, you are a gambler. Yes, you will get lucky and could make great profits. However, in the long run, the profits of the gambling trader are just short term loans.

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Past Trading Lessons

April 15, 2018Do You Gamble or Trade?T.MOGO | ZIXI
April 9, 201810 Ways to be a Better InvestorHAL | XOM
April 2, 2018Be the Fussy TraderT.HXD | VXX | SDS
March 25, 2018How to Be a Better TraderV.GENE | V.HEMP
March 18, 2018Trade Stocks for a Living - What You NeedNFEC | RKDA | AMTX
March 11, 2018Don't Be a Reckless TraderVVUS | YRD
March 4, 2018Seven Ways to Take Emotion Out of TradingV.PQE | ARLZ | UPLD
February 25, 2018Trading Success with StatisticsACHN | T.THO
February 18, 201810 Ways to be a Better InvestorSTKS | CTG
February 12, 2018Never Fall In Love, Is the Stock Market Crash Over?AQMS | UAA
February 4, 2018Here are 7 Reasons to Say No to the TradeVXX
January 28, 2018Does Size Matter?VXX
January 21, 20183 Ways to Improve Your Trading ProfitsLTRX | NVCN
January 7, 2018Trade Less, Make MoreHEB | NIHD | V.SLL
December 23, 20178 Trading Resolutions for 2018
December 10, 2017Trading a CorrectionBUR | BCRX
December 3, 2017Strength Brings WeaknessROX | ETSY
November 26, 2017Up 27% in 4 Months, How the Big Wins Pay the ProfitsV.KALY | GLOW
November 19, 2017Overcoming FearSRAX | HIBB
November 12, 2017The Importance of Trading LessAPTO
October 30, 2017When to Say No to the TradeT.PGF | T.CPG
October 22, 2017How to Find Hot Stocks EarlyV.NGC | T.PAY
October 15, 2017How I Have Earned 33% Since AugustPLG | XNET | HRG
October 9, 2017Data Based InvestingT.SIS | BPTH | NTNX
October 1, 2017Emotion is Your EnemyCRMD | OPTT
September 24, 2017Return on CapitalT.XIU | T.XEG
September 18, 2017The Economics of TradingLLNW | DHT
September 10, 2017Money Clouds Your JudgmentATOS | GNW
September 4, 2017Key Concepts for Reading Stock ChartsT.NGD | V.GUG | ABCD
August 27, 2017Work Hard When the Market is EasyNTLA | T.AR
August 22, 2017How to Trade and Sleep Well
August 14, 2017Fear or Fact, What Drives Your Trades?
August 7, 2017Fooled by Randomness
July 24, 2017The Danger of Knowing Too Much
July 17, 2017An Important Announcement
July 10, 2017How to Measure Trading Success
June 26, 2017Fussy Traders Make More
June 19, 2017Stop Trading Sense
June 12, 2017NoNo FOMO
June 5, 20178 Emotional Trading Mistakes
May 23, 2017Care Less, Make More
May 15, 2017Most Traders Gamble, Do You?
May 8, 2017Trading the Opening Hour
May 1, 201710 Ways to be a Better Investor
April 24, 2017My Approach to Day Trading
April 17, 2017Traders Should Not Think Like This ...
April 10, 2017Bat and Balls
March 27, 2017Drunken Trading
March 20, 20177 Ways to Take the Emotion out of Trading
March 15, 2017The Trader Laptop