This ‘Tweak’ Should Help Improve Your Returns
It’s
been a couple of weeks since my last column. During this time the
market has worsened significantly. Distribution has begun to pop up again.Â
Upside breadth has deteriorated while downside breadth has picked up. Many
stocks that looked to be building bases have seen those bases fall apart. More
leaders have rolled over than emerged. As I write this a little after 2pm, the
markets are mixed but have rebounded a little from the morning. Due to the
above-mentioned factors, caution is warranted if you’re looking to play the long
side. The short side could provide some lower-risk opportunities soon, but many
areas are beginning to get extended, so caution is warranted there as well.
While I was away from the
office I got a chance to spend a couple of days in Las Vegas. I always enjoy
getting to go to a casino. Card games are my favorite. Mostly blackjack and
poker. When it comes to blackjack I’m a decent player, although I didn’t do too
well this time.Â
To survive the blackjack table
over long periods of time you must at least know the basic strategy. (The longer
the time period, the lower the luck factor.)Â The basic strategy involves
understanding how you should play your cards based on what card the dealer is
showing. For every scenario, you should know when to hit, stand, double, split,
or surrender. (If you’re new to the game you can buy a cheat-sheet in many
bookstores or casino gift shops. Most casinos don’t even care if you sit at the
table with it.)
To improve your odds, card
counting methods may be employed. The basic idea behind card counting is that
when there are a large number of high cards left in the deck, the odds are
slightly in the player’s favor. When there are a large number of low cards in
the deck, the odds shift to the dealer’s favor. While it is near impossible for
anyone but Rainman to remember every card that has been played, most people
(with practice) are capable of keeping a rudimentary count of high vs. low cards
once they understand the technique.
Once a rough count of the cards
is made, it is then a matter of adjusting the bet based on whether the deck
favors the player or the dealer. For instance, if you normally bet $10, and the
deck becomes very positive, you might want to raise your bet to $15 or $20. If
the deck becomes very negative, you may want to lower your bet to $5. (Oh
yeah…you should also note that casinos don’t like counting and if they notice
you doing it, they’ll take steps to prevent you from playing there anymore.)
So what does this have to do
with trading stocks? Well, professional traders and professional blackjack
players both make a living employing this same principle. Bet big when the odds
or in your favor, and bet small (or not at all) when they aren’t. The
indicators I discuss when I talk about the market are ones I use for my own
decision making. As a trend-trader, I will bet bigger when the trend appears
strong and likely to continue. I will bet smaller when the market is choppy or
trendless. (You’ll notice I’m not the only one, since choppy, trendless markets
also tend to be accompanied by lower volume.)
A novice blackjack player will
many times manage to break even over long periods of time by simply practicing
the basic strategy. Novice traders can also fair OK by employing their basic
strategies. For either person to step their game up to the next level they need
to understand when the odds are in their favor and when they aren’t, and have a
strategy for adjusting to that. Whatever your basic stock trading methodologies
may be, it is important to remember that they will work better under certain
market conditions than others. Understand what market conditions best suit your
methodologies and then do your best to determine whether the market is likely to
help or hinder your trades chance of success. This “tweaking†should help to
improve returns over the long run. And unlike the casino, the stock market
doesn’t stop you from playing if you’re “too good.â€Â
Best of luck with your trading,
Rob
Â