Entering a casino to gamble can either be a means or an end. It's an end for those who yearn for excitement or boosting of ego by displaying skills of guile and cunning to outwit the other players. It's a means for professionals who want to make money by winning.
Which one of these describe you?
Something happens to people when they enter the bright lights and sounds of a gambling house. They seem to lose all touch of reality of the basics of money, as well of expected Rate of Return on one's money.
I suppose it has something to do with the possibility of "Winning Big" and turning your life around. They envision making huge returns by employing their vast array of skills, and outwitting their over matched opponent. The thing is, most attempt to make out-sized returns, by employing outsized bets, leading to the ruin of most players.
You have to treat trading like a business, because you better believe that the professional opponents you are up against are doing just that. You are a buyer and seller of inventory. Period. You do not plunge; you do not trade for excitement or the "need" for speed, or to pay the rent.
If this is what you are looking for then it is what you will find – but the excitement & rent money will go to the banksters, while you will be left with a hole in your pocket and a feeling of low self esteem.
If you step into the trading arena "needing to" win, you will simply be run over by the pros that don't need to. Needing anything is putting you at a distinct disadvantage, because rather then focusing on playing the cards dealt, you will force moves, and then it will simply be a matter of time before you walk into a trap that your better capitalized, more clever, and more criminal opponent will lay for you. They say all is fair in love in war, and this holds true in Trading.
Your bankroll. Your chip stack. This is what you bring to the table, and it is critical that it meets the following 2 criteria.
1) Be able to play comfortably and long enough to allow your Trading system the required sample size to realize it's edge.
2) You never bring your entire bankroll to the tables. You always, and I mean always, have an out. In case of some unforeseen catastrophe, mistake, criminal act, you have to have reserves to come back with. If you don't have any reserves, then don't play until you get some.
Throughout this program, we are presenting you with winning concepts. Ones that you must employ if you want to survive and thrive in this game. This being said, we are not naive and we know all of you wont be adhering to the numbers we present to you, and honestly, that's OK. Every player is different. No two people have the same genetic makeup of risk taking, handling loss, persistence, economic background - so the guidelines we provide are just that, and you can adjust them as you see fit. If they sound too aggressive, then simply reduce bet size. If it's too slow for you then increase bet size.
But what you can never violate is the 2 requirements of bankroll we presented above.
And in order to adhere to that, you are going to have to implement 2 Money Management Concepts:
1) Loss Limits
2) Regression Betting.
In any game of betting, and trading in particular, the saying goes "Manage your Losses, the wins will take care of the themselves". No matter how good your system, or how good of a player you become, there is simply nothing you can do to avoid the inevitable cold streaks that you will experience as a player.
It happens to the best players - remember, each bet is a 50/50 proposition, and in the short run the distribution of outcomes simply cannot be predicted. It's during these times that loss limits will guard your precious capital, and ensure you exit the casino before going broke.
You simply must have circuit breakers in place to protect your stack during the unavoidable and unpleasant periods of drawdown. These money management guidelines will slow you down when you hit a cold streak, and as such are critical to long term survival. They must be adhered to religiously, and never broken. You can be flexible in determining your own parameters, but I am warning you not to stray too far from what we are presenting. Always Remember, you have no clue as to how the next coin flip will land - so bet accordingly.
1) Max risk per bet is 2.5% of total Equity Capital.
2) No more than 10% ever at risk at one time. (i.e. Four 2.5% bets, Ten 1% bets, Twenty .5% bets)
3) As you experience a drawdown, you should reduce the % risk per each bet. Further to this, your bet size is naturally & automatically smaller because it is a % of your equity. Please look at the below table for illustration:
|1||1st bet (2.5% of equity)||(2,500)|
|2||2nd bet (2.5% of equity)||(2,438)|
|3||3rd bet (2.5% of equity)||(2,377)|
|4||4th bet (2.5% of equity)||(2,317)|
|5||5th bet (2.5% of equity)||(2,259)|
|6||6th bet (2.5% of equity)||(2,203)|
|Remaining Equity||85,906||2.5% bets||6 bets|
|7||7th bet (1.5% of equity)||(1,289)|
|8||8th bet (1.5% of equity)||(1,269)|
|9||9th bet (1.5% of equity)||(1,250)|
|10||10th bet (1.5% of equity)||(1,231)|
|11||11th bet (1.5% of equity)||(1,213)|
|12||12th bet (1.5% of equity)||(1,195)|
|13||13th bet (1.5% of equity)||(1,177)|
|14||14th bet (1.5% of equity)||(1,159)|
|15||15th bet (1.5% of equity)||(1,142)|
|Remaining Equity||74,982||1.5% bets||9 bets|
So the key points I want you to take away from this are:
1 – You have to lose 15 bets in a row in order to lose 25% of your capital.
2 – Even if you lose 15 in a row, you still have 75% remaining to come back with. You are still in the game.
3 – As a losing streak progresses you continue to regress your bets. So in the above example we lose 15% on the first 6 losing bets, then we regress bet size from 2.5% to 1.5%. This enables us to place 9 more bets (50% increase in number of bets from phase1) while losing only 10% of starting equity (33% reduction in capital loss from phase1)
At this point if we are still mired in a losing streak, we would then regress to .75% of Equity capital per bet. This would reduce our bet size on the 16th bet down to $562 per bet & the net effect would be that we are able to place 9 additional bets for losses totaling $4,912. Compared to phase 2, in phase 3 we still get to place 9bets, however we reduced our equity loss to 5% of starting equity, or a reduction in capital loss from stage two of 50%.
The flip side of this coin is that when you are playing well and get on a hot streak, your bet size is naturally increasing along with your chip-stack.
The key here is not to get over confident during winning streaks and start increasing the equity % per bet; rather, you keep that constant, and only through increase in chip stack size are your nominal bets increasing. You have to stay grounded, and not get caught up in the excitement of winning at the racetrack. The 7,8,10 or 15 bet winning streak you are on is a random statistical distribution of outcomes, and you want to make sure that when your lucky rabbit's foot ceases to work it's magic, that you aren't at the tables placing your biggest bets right as the next losing streak commences.
This is how months or even years of hard won gains get wiped out in short order.
This is a most critical concept to understand, internalize, accept, implement into your program, and most importantly - follow religiously! If you do so, you will always be in the game - able to make adjustments, right the ship, catch the next trend, and most importantly, simply have another series of shots. As the adage goes, you can’t make the shot you don’t take; and in this game, without chips, you got no shot. – Never lose your stack!
When you follow this betting pattern, Not only will you be avoiding a ruinous financial loss on a random few outcomes, more importantly, you are preserving your emotional and mental capital which is absolutely sacred and must be guarded vigilantly.
Being totally wiped out is a devastating, sickening , rotten and empty feeling. The reason is elemental & fundamental to being human – It’s about hope and all the future possibilities that come with that.
With it, we can gather energy to fight through difficult stretches, we can work towards a better future, to achievement of a goal, to completion of a mission. When you don’t even have a chance or hope for redemption, then you truly are in a ditch in which it is very difficult to extricate yourself from. So let’s do both of us a favor, and never put yourself in that position – Follow this golden rule, & never lose your stack!
Regression betting is a concept I learned from a Craps master, and it's brilliance is only matched by its simplicity and effectiveness. While we will talk about regression betting as it pertains to individual place betting strategy later, I want to discuss the concept and how we can apply it to chip stack management.
The theory goes as follows: in a series of bets, after a win, you reduce your bet size on the next bet. Now translated to managing your chip stack in the futures game, we do this in a slightly different way. You do it by removing funds from your brokerage account as you win. As this reduces your chip stack at the table, and as your bets are a consistent % of that chip stack, your bet size will be limited, while at the same time you ensure you start packing your wallet with some of the hard earned winnings.
If you are new to trading or gambling, this might seem elementary to you; you may ask, what the hell is this guy talking about? So I'll elaborate.
If you have $20k cash in your hand, it will take you a few minutes to count it. As it's 200 One hundred dollar bills, you'll probably make piles of 20 or 50, licking your fingers while you count to ensure you don't miss one. Then when you are done, you'll count it again, not only to ensure you got it right, but just because it's fun to count. When you are done, you'll look at it and say, "damn that's a lot of dough!"
If you have $20k in gold, it will take you 30 seconds to count it. The weight feels amazing in your hand, and you will spend about 10 minutes admiring the beauty of the coins - Like that freak from Lord of the Rings, you'll stare in amazement and wonder at your precious metals..."My precious..."
But when you have $20k in margin in your brokerage account, well that' something totally different. It's numbers on a screen...it's scoring in a video game. The blinking lights and numbers move up and down without any real attachment to you, like a second life in pac-man or mario brothers. There is a sense of disconnect to reality, and you lose sight of the amount of money you are dealing with. When that happens, you tend to lose financial perspective and that's when you get sloppy... and that then leads to whittling down of your stack.
If somebody took $5k of your bills and set it on fire, or if they took 5 ounces of your gold and tossed it in the sewer, you'd fly into a rage and try to kill them. Yet, when you do this to yourself in your electronic account, your pulse will barely move above normal. This is a extremely peculiar phenomenon, but I assure you it exists.
When you are winning and having a great month, and your account equity has jumped higher - you simply will not want to remove any funds from your brokerage account. You'll think "If I leave it there, I'll make another 25% on top of it...then I'll withdraw some." Then inevitably the dice go against you, and all your winnings with it... Flushed down the toilet bowl.
Please don't place your winnings in here...
Perhaps this will be a better move?
"If he pushes his confidence to it it's logical limit, he's bound to go broke" - Wiser trading words have rarely been said.
I can't tell you how many times I've had this happen to me, and if I could only go back and reclaim 5% of the profits I've given back to the casino after being up and not cashing in, it would be worth a small fortune indeed.
So please, do us all a favor and make it a point to withdraw funds from your broker account each and every month. Make it a consistent % or rule - Something like 25-40% of all monthly winnings are withdrawn.
Our advice is to go to your local coin dealer and stack some metal. This way you have savings while still carrying a investment. It's a pain in the ass to liquidate, so you wont run to dump it back into your broker account after a draw-down.
It's out of the system. It's wealth. It's yours. You've earned it, and now you are keeping it safe and sound, away from the perils of the casino.