The House Always Wins and You Can, Too

Stop gambling on the stock market!

Just stop it – unless you want to end up in Traders Anonymous.

See, most traders think of the market as one big roulette wheel or poker table. Get lucky and win big, they say. That’s all you can hope for. It’s like that stupid lottery pitch – all you need is a dollar and a dream.

But I’m telling you right now – that’s just plain wrong.

Today you’re going to see exactly why it’s wrong. And how you can consistently thrash the market over time by thinking like a casino owner, not the idiot gambler betting the mortgage on a lousy pair of eights.

That’s because, as my colleague Jonas Elmerraji reminds us, being a winning trader is almost exactly like operating a successful casino…

“Casinos make money by working the long-term odds. They want you to sit in front of the tables for as long as you can – it’s why they keep plying you with free drinks and comp you on hotel rooms, shows, and flights. They know with mathematical certainty that if you play their games long enough, you will lose money.”

And that’s what you’re going to do from now on – make money by working the long-term odds in your favor. You’ll see how in a just a minute. Go on, Jonas…

“Sure, casinos can lose money in the short-run: a player might have a hot streak, or a slot machine might hit a jackpot. But the average expected return of each player who walks through the door is still negative. That’s why casinos actually like paying out jackpots. Big, public payouts fool more players into believing that they can walk out as winners.

“In reality, walking away from the casino with more money than you started with is a statistical anomaly. It’s just dumb luck.”

But as Jonas explains…

“As a trader, you’re not one of the guys crowded around the roulette table or cranking the arm on the slot machine. When you’re a trader, you’re the house.”

Bingo. What Jonas is saying is when you’re a good trader, you’re the house. That’s because the house always wins in the long run by playing the long-term odds in its favor. If you’re a good trader, so can you. How?

By sticking to our Rude laws of trading we discussed over the past few weeks. They show you how to beat the market over time. Follow them to the letter, and you’ll master the game. You’ll hold aces to the market’s kings.

Do you remember both of these important rules?

  1. Obey your stop losses. Do it every time. Period. No questions asked. Don’t let small losses become big losses. If you obey your stop losses you’ll cut your losses short – just like casinos do by only taking small losses. If your emotions tell you to hold on to a stock after you’ve hit your stop loss, throw them down a well. And as a corollary…
  2. Never buy a stock without determining your trading goals. Know your short-term trades from your longer-term core holdings. And build a concrete wall between them. If you don’t, your short-term trades will become big losses because you lack the discipline to cut them loose when they go against you. Stick only to trades that fit your preplanned criteria, you will make money over the long haul—even if you get stopped out and take some losses in the meantime. Remember, casinos takes small losses, too. Just not big ones.

The next time you’re thinking about betting on a long-shot stock—or taking a risky trade that you wouldn’t normally make, ask yourself this: Am I just a degenerate gambler, or the House?

The gambler follows his emotions. The House doesn’t. It cuts its losses early. And remember, the House always wins in the long run…

Regards,

Greg Guenthner

for The Daily Reckoning

P.S. Remember, the House always wins in the long run. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.