Meeting the old timer at the craps table back in 2011 changed the way I bet forever.
In picking his brain that afternoon, I realized that my style of play was playing right into the casino's hand. Most gambler's, without even realizing it, place low odd wagers and then place these bets in such a way that it guarantees the house will win eventually. And sooner rather than later at that!
The loser routine usually looks something like this:
1 - Has a general concept of the game he plays, relying on a handful of plays or setups he read somewhere.
2 - No clear betting plan, which usually means that you bet bigger and bigger as you are winning. This continued tactic of "pressing your bets" is employed because of the greed and euphoria that take one over at the casino.
As you start winning, your ego will start to take over the rational part of your brain. After each win your confidence grows and you realize you are winning because of how smart, shrewd and clever you are. You are a master of the markets now, so you need to keep betting bigger and bigger. If you don't, then you will delay purchasing that $3m house you have been eyeing on Remax, and that is absolutely unacceptable. After all, how can you you throw a pool party with a bunch of strippers, if there is no backyard and no pool?
So in order to make this happen you need to bet 20-30% of your equity on each bet. This will ensure you make the 700% annual returns you need.
Not surprisingly you win the first few & you have doubled your account - Now it's time to work on the next double. Only problem is that as a coin has 2 sides, it's bound to go against you, and so it does. Your "double" is quickly halved, and then halved again. You now need a new double just to get back to even, and predictably when you "need" something from a casino, it's the very last thing you get. Instead of a double of your stack like you need, you are lucky if you get comped a few tickets to a matinee show of some washed up magician.
Trade Like The Commercials
The old timer warned me that the "7 is just around the corner". And of course it is. After all, there are 6 ways to roll a seven, while every other number has less ways than that. It's the house edge at work.
So to combat this house edge he did 2 things:
1 - He places the odds in his favor - He does this by placing 2 numbers instead of one. If you only place bet the 6 or the 8, which both can be made 5 ways by a set of dice, then you are always dominated by the 7 which can be made 6 ways. Over a long enough period of time, the house always wins. However if we place the 6 + 8 simultaneously, well now the edge is in your favor by 10-6. (5 ways to make a 6 + 5 ways to make an 8 versus 6 ways to roll a 7.
2 - He reduces bet size after a win, rather then greedily increasing size - So now that you are almost a 2-1 favorite, you are very likely to see one of those numbers prior to seeing the dreaded 7. So if you bet 2 units, then after the first hit, you pocket the gain & reduce those betting units by 1. Even if the next roll is a 7 out, then you would still be a winner for that series of rolls.
Compare this strategy to what the typical gambler would do. After a win they would leave their full bets on the board, and likely even add to them with their winning bets. They keep employing this strategy during a hot streak because they want to maximize what they can make, and are absolutely positive they'll be able to get out before the table goes bust.
Of course, you don't get out in time, and instead you wash out.
Thinking back now, it's striking to me how similar his behavior is to that of the Commercial Traders when we look at the COT reports. They consistently buy weakness and they sell strength. In other words, when things are going good, and the casino is getting all excited, they calmly sell into it, steadily banking profits.
When there is panic and prices are sold, they enjoy picking up a good bargin, or better yet getting a steal when somebody is getting foreclosed on.
Of course if you had their resources and criminal contacts, you'd be able to do the same thing. But we'd be making a huge mistake if we chalked up their winnings to criminality alone. No, they are in fact master chess players and gamblers as well.
By unemotionally selling into strength they are not only locking in profits, but they are naturally reducing their bet size, so that once the market turns they will not be giving back all of the profits they have amassed.
When you start using the COT reports in Alchymist, look not only at the Net Commercial positioning score, but pay attention to the weekly and four week activity and their respective relative scores. Not only is this valuable information to be used for trade setups, but you get to follow how winners behave in the market place.
The Leveraged Funds and speculators will always be holding their biggest position right as the market begins to change course, reversing against them. They are then scrambling to get out, selling into weakness, which further exacerbates the moves. The commercials are on the other end of this trade of course, like a whale ready to swallow everything that is being offered.
Regression betting with Futures
So we are discussing gambling concepts and pointing out how winners handle their place betting. How is this actually utilized in the Futures game?
It's a very simple concept actually. First and foremost, we know that before entering a trade we have numerous indicators in a state of Unity, pointing us in specific direction. This includes the Fundamental picture, Commercial Positioning extremes, Wave Structure, Seasonal tendencies, as well as other statistical extremes. Second, we have our Pivot Points and know exactly at what prices we will be entering and existing our positions - we are following the traffic lights in the Alchymist Platform. Regression betting is now one tactic for the execution part of it.
Most importantly we have calculated the odds, and know we are placing a high probability bet. This can be:
- Betting on seasonality - By using Alchymist's "Returns by Month" report in the Odds Table menu item, for any future you can see the historical performance by month. So let's take Gold. You see that going back to 1990, Gold sports a 68% winning % in the month of August with Avg gains of $32, vs losses of $21. So not only do you have 68% odds favoring a long bet, the payoff is 3-2. Whats important to note is that the best way to take advantage of seasonals is to be "stalking" months in advance. If gold is bullish in August, and currently it is May and gold is getting smacked, you should be getting very very interested. You are watching, like a hawk, for signs of selling exhaustion. You then look to structure a 90 day trade for a core position - You may trade around this per your short term signals.
- Betting on Extreme Positioning by Commercials or Funds - You see Soybeans in a nasty downtrend, selling off 100 cents over the past month. Then, while doing your homework on the weekend, you see commercials have a 4wk change score of 98% - They have been aggressive buyers into this decline. 3PC confirms this in the weekend report informing you there are 4-1 odds given this setup. You now are stalking and waiting for a green light signal.
- Measuring Probabilities - Using the probability table, you can measure current trending moves. For example, you see the S+P had rallied 130 points in 7 days. You go to the probability table and see where that ranks over the past 20 years for all 10 day advances. You see this places you in the 97th percentile of all 10day rallies. Do you short this? No! But you are now on guard as you know there is only a 3% probability of this move continuing higher over the next 3 days. You then get a signal of price closing below the 4channel high pivot & you enter short.
OK, Odds are in your favor - now, when you are ready to enter a trade, you immediately purchase your insurance along with it - i.e. buy a protective futures option right at the money. If you go long $65 oil, then buy a 65 put. A 30 day option in Crude oil at the money, will cost you $2.
This has the immediate effect of quantifying your maximum loss, so there will not be any fear in your play. While it does reduce your profit by about 50% initially, because the delta of a ATM (at the money) option will be approx .5, you can recoup these losses as the trade goes in your favor by selling a covered call.
So lets say in this oil example, you are right and the position moves to 67. You will have lost $1 on the insurance, but you make $2 on the future. - You are up 1.
You can now sell a covered call say @ 69 for $1, which allows you another $2 of upside on the future, but also reduces the cost of your 65 put from $2 to $1. So you now have a situation where you can make $4 on the future, but you lose $1 on insurance for R/R of 3-1.
Just be sure that in the event prices stall and reverse against you, that you close out that position prior to it turning into a loss. It's critical that you exit that betting series with a profit. You should never, ever allow a wining position to turn into a loss.
Regression betting is a winning betting strategy because you are not only locking in a profit on a favorable price move, but you still leave yourself exposure in the event the trade continues in your favor. As prices move in Waves, and hence ebbs and flows, you can use these waves to continue to layer on additional Regression Bets.
So don't be scared of selling out "too soon", because you will "miss the move". Get in the habit of constantly flowing into and out of your positions, as opposed to holding onto it with a iron grip. Grind away profits one series at a time. If there is a spectacular move in a commodity you will have many opportunities to add additional exposure during the impulsive moves.
Remember, these are winning concepts for place betting, not iron clad rules. You can adjust these methods to fit your risk profile. For example, instead of buying the 65 ATM put in our example, perhaps you decide to buy the $63 put which only costs 70 cents instead of $2. You are willing to risk the $2 lower because you will be trading at tight pivots, and will control your risk that way.
As you gain experience, you will learn what works best for you.