Photo Credit: ZATZAi
There are many similarities between the game of Blackjack and trading. If you are a trader or wish to be one, you should watch “Breaking Vegas”, a documentary about the organized MIT Blackjack Team (MBT) that went against the odds to beat the casinos (note: the story was also depicted in the film “21″). The following similarities towards trading will be taken in reference to this specific MIT Blackjack Team.
It is math and probability
The MIT Blackjack Team was using a card counting technique to keep track on the number of big cards in the deck. They heavily adapted their strategy from Edward Thorp’s card counting system. The key is that math can be used to come out with a system that evaluates situations with higher probability of winning, on a seemingly random card game. You can even overturn the odds which are in favor of the casino to you.
Likewise for trading, the odds of taking profits from the market are stacked against you. There are professional, institutional traders and insiders who are in better positions to win. Hence, as a trader, you have to use a system that gives you an edge or a higher probability of winning in order to beat the market. That is why most of the technical analysis tools are so mathematical and statistical in nature. The correct combination of various tools and indicators will provide you a system with that edge in the market.
You must have a system
As mentioned above, the MIT Blackjack Team had a system. Trading must have a system. MBT coupled card counting technique with team playing to further enhance the odds of winning. The concept is that with the probability in favor of them, as long as they play in large numbers, they are able to generate profits faster. There is some form of diversification of risks as well; by having more players, the variance in performance of individuals can be averaged out.
Importing it to trading, you should not hold counters of the same industry or country. There must be some form of diversification especially when your capital is large, such that any industry/country fails to deliver, your returns will only be affected slightly. It is also very important to maximise your capital when the system signals very good opportunities, leverage if possible.
Proper money management is required
Another important aspect of playing Blackjack is to manage the size of the bet accordingly. You need to survive losing streaks when the odds are low, that is why MBT has players who act as small players to monitor the situation. They will signal their team mates to enter the table with large bets when odds are high.
Trading advocates cutting losses and position sizing. There must be rules like “I will only risk 2% of my capital at any one trade” as your money management plan. If the market turn against you, you must take the 2% loss. This is just like MBT’s playing. If you vary the bet size accordingly to your perception of the hand, it is likely that your returns will be affected and worse, your capital wiped out.
The system is transferrable
The MBT recruit new players to teach them the system and it has been proven that the system is transferrable. This is analogous to the turtle traders started by Richard Dennis and William Eckhardt. They had a bet whether trading can be taught and eventually, Dennis proved that it really can be taught. Although everyone uses the same system then why not everyone has the same results? My explanation is that the system is fixed and dead, and the human is the one living it. The decisions that he/she makes will produce a difference to the results.
The player must follow the rules amid distractions
As a MBT player card counting in the casino is made difficult by the distractions from the surroundings and ongoings. He/she has to concentrate even more and make sure the counting is accurate. He/she also has to remember and apply the rules accordingly in every hand. In order to prep the players, MBT make them undergo a rigorous test known as “checkout” where the testee is required to pass to become play for MBT. The training simulate all the distractions in a casino and then more, such that if they can survive a worse environment, they would have no problems in the actual one.
Trading has it’s own distractions. They come in the form of financial news, brokers’ recommendation, friends’ recommendations, as well as personal emotions. Often than not, the last is the killer. He/she who cannot follow the rules of his/her trading system is not trading correctly and profitably. He/she cannot allow the mentioned distractions to affect his/her trading decisions that were derived based on the rules. There is no point using a good system when you do not follow it properly. All the positive expectancy offered by the system will not be realised.
Now, you can enjoy the show:
Part 1:
Part 2:
Part 3:
Part 4:
Part 5:
Part 6:
{ 2 comments… read them below or add one }
Solid analogy. For some more details on the management of the MIT Blackjack Team, which was started and led by Harvard College and Harvard Business School grad Bill Kaplan, it’s worth reading the following article in Inc. magazine that appeared last summer – http://www.inc.com/magazine/20080801/luck-is-for-losers.html
Thanks for the link!