Six Simple Rules For Making Money In The Markets

  • April 2, 2003
  • Rob Hanna


There was no column on Monday because I was on
vacation, and busy playing blackjack. For those people who love trading,
blackjack can provide many of the same exhilarating feelings. For those people
who take vacations to get away from the markets and unwind, don’t stay at a
casino. Go to the mountains or the beach instead.

As I sat at the blackjack table, I was once again amazed at the way some people
throw their money away with stupid bets and poor playing choices.

Here are a few questions for you (answers below):

  1. If you have an Ace and a Six,
    and the dealer is showing a Seven, what do you do?

  2. Under what circumstances
    would you want to split Five’s?

  3. If you have a Four and a Six,
    and the dealer is showing an Eight, what do you do?

If you don’t know the answers
to these questions, you shouldn’t sit down at a blackjack table. When played
correctly, the odds of winning at blackjack are approximately 50/50 (without
counting cards), yet casinos make extraordinary amounts of money at their
blackjack tables. This is because most people don’t bother to do the basic
things necessary to put themselves in a position to win.

As I watched people get crushed at the blackjack table because of stupid
mistakes, I realized there are several lessons to be learned from blackjack,
that are applicable to trading:

  1. Know
    the basic strategy     — You should know the correct
    play for every situation, whether it be hit, stand, double, split, or
    surrender. If you don’t know, you can buy a cheat sheet in many casino gift
    shops (about $2). They don’t care if you sit there at the table with it. You
    should also know your next move for any situation with regards to a position
    you are in, whether it gaps, breaks supports or resistance, bounces off trend
    lines, or makes any other significant price move. Know where you’ll scale out,
    re-enter, completely exit, etc.

     


  2. Execute the strategy     — Don’t hit or stand based on
    your gut feeling or based on the whims of the drunk sitting next to you.  Make
    the move that gives you the best odds to win.  Don’t buy a stock based on gut
    feeling or what the drunk at the blackjack table says either.    Make sure you
    look at all of your criteria before entering a position, whether fundamental
    or technical.  Then know you triggers, and execute your plan. 

     


  3. Don’t bet more than you can afford to lose     — You
    don’t want to be wiped out on one bet or one trade.  You also don’t want to
    lose all of your gambling money for the weekend at the first table you sit
    down at.  Don’t let one bad market session or one week decimate your account. 
    Above all, if you lose all your money, don’t ask the casino to extend you
    credit — they will.  And don’t buy stocks on margin if your not making money. 
    You’ll find your broker to be just as accommodating as the casino.  They’ll
    both lend you all the rope you need to hang yourself.

     


  4. Practice sound money management     — If you’re up a
    bunch of money at the table, make sure you walk away a winner. Nothing feels
    worse than being up big, and then walking away having lost money. If a trade
    is significantly in your favor, make sure you either take some profits, or
    move your stops up, or both. Don’t lose money on a stock that is a big winner.

     


  5. Make sure you’re in a positive environment
    — If the dealer’s a jerk, and the casino is a dump, and rest of the people at
    your table are annoying, get up and move. There’s always another blackjack
    table, and it’s a lot more fun to play in a positive environment. With regards
    to trading, make sure distractions are minimal. Make sure you have everything
    you need nearby. Make sure you surround yourself with the kind of people that
    will not hinder your trading during market hours, or trade alone.

     


  6. Don’t drink too much     — Casinos
    don’t dole out free drinks because they enjoy partying with you. They prefer
    someone who can’t think straight, who will make stupid mistakes, and throw
    their money away. If your decision-making is impaired, you chances of winning
    are significantly reduced. Same for the markets. If you’re not mentally
    capable of executing your plan, you should do whatever it takes to get
    yourself back into the correct mind frame. For some, that might mean taking a
    break from the markets. For others it might mean coffee and Tylenol.

Regardless of whether you are
playing blackjack or trading stocks, you should do everything you can to put the
odds in your favor and give yourself the best chance to make some money. Follow
these six simple rules, and if you still can’t make money in the markets, invest
in a few disguises and learn how to count cards.

From a market standpoint, not much has changed since my report last week. We are
still trading between the 50-day moving averages and the March highs. I see
positive action and good breakouts in a number of issues. The long side looks
like the place to be, but the markets are still clinging to every bit of war
news, which increases both volatility and risk.

As always, feel free to email me any questions or comments.

Best of luck with your trading (and card-playing),

Rob Hanna


robhanna@rcn.com

 

P.S.  A great book how to bet
at different casino games (including blackjack) is Edwin Silberstang’s “Winner’s
Guide To Casino Gambling.” An excellent nonfiction read about card counters is
“Bringing Down The House,” by Ben Mezrich.

Now for the answers:

  1. Hit.

  2. Never split 5’s. You’re
    likely going to end up with two bad hands instead of one good one.

  3. Double.