Apply This Blackjack Example To Your Trading

  • July 14, 2004
  • Rob Hanna

The market
continues to worsen.  Today the market gapped
lower on Intel’s poor report.  It then attempted a rally.  This rally couldn’t
even last until noon before reversing.  The indices then ended up near the
levels they gapped down to in the morning.  The selloff  didn’t manage to bring
any fear into the market.  The VXN edged up only slightly while the VXO
dropped.  The market has sold off steadily for two weeks now and the VXO has not
budged.  It may take some real sharp selling to bring some fear into this market
before we will see a decent upside reversal.  I’d continue to play it close to
the vest. 

One more blackjack column and I’ll have it
out of my system…

I mentioned on Monday that I did not do well
last week at the blackjack table.  The problem I encountered was not in my
execution of the strategy.  I played the cards according to the odds.  My
problem (other than some rotten luck) was my money management. 

When I sit down at a blackjack table I
always know how much I am willing to risk during that session.  If I sit down
with $100 and I lose the $100, then I’ll take a break for a while.  This is
effectively my “protective stop”.

In addition, if I’m fortunate enough to find
myself up a decent amount, I will set aside my original stake and then play with
my winnings.  This would be my “breakeven” stop.

If I continue to win, I will continue to set
aside more money.  This is effectively a “trailing stop”. 

So what did I do wrong?  Well, I ignored my
breakeven and trailing stops.  And if you’re going to ignore them, really, what
good are they?  I sat down at the table, got a run of good luck and found myself
up an amount where I should have set aside my original stake.  Instead of doing
that, though, I began to play more aggressively.  After an extended period where
the height of my stacks didn’t change much, my luck changed for the worse.  I
had a period of 9 or 10 hands in a row that I lost.  These included a few hands
where I either split or doubled down and lost twice my original bet.  After that
string of bad luck, I found I had gone from positive to negative on the
session.  I still didn’t want to quit, though, so I continued to play.  My money
ran out before my luck changed.

I don’t mind losing at blackjack, and I
don’t mind losing stock trades.  But when I see a nice gain turn into a loss
because I fail to raise my stop that can really get to me.  It hasn’t happened
to me in a long time with my stock trading, but the feeling I had when I left
that blackjack table was the same feeling I used to get when I didn’t follow my
trading rules.  Following your trading plan and still losing money will happen
sometimes.  If your plan is sound, and the odds are in your favor, then over the
long run you should come out ahead.  What can sink you both financially and
emotionally is ignoring the rules, as I did at the blackjack table last week.

Best of luck with your trading and card
playing,

Rob


robhanna@comcast.net

 

Â