Trading is gambling. Stock market is a giant casino.
What happens in gambling?
The player always losses money. He might have few wins based on luck but in the long run player always looses. And who always wins?
It's the house. The House always wins !
Casinos always win in the end and that is the reason they offer free food, drinks to its customers to encourage them to play more and more. Because the more bets players will place the more money casinos will make. But how do they always win? Because they have rigged the game in such a way that they have a statistical edge. Let's understand it by taking an example of American Roulette.
If you don't know about roulette, it's a very famous game where you have a wheel with 36 pockets numbered from 1 to 36 colored in red or black. Apart from numbers from 1 to 36 it has two pockets zero (0) and double zero (00) colored in green. In total, there are 38 pockets. Along with this there is a table layout with corresponding numbers and bet options.
For our example, let's assume the player places a bet on red or black diamond box. The winning bets will be determined based on which pocket on the wheel the roulette ball comes to rest on.
Every time the player is going to bet ₹1000 and whenever he wins he is going to get ₹2000 but when he loses he is going to loose only ₹1000. Payout of 1:1.
Remember, we mentioned that there are 38 pockets numbers on the roulette wheel 1-36, 0 and 00. Red or black diamond boxes are numbered between 1-36. So, for the player to win, the roulette ball has to land in 18 of the red pockets if he bets on red or if he picks black then it has to land on 18 of the black pockets. Hence,
the probability of a player winning the bet is = 18/38
which comes out to be 0.4736 or 47.3% whereas
the probability of the player losing the bet or casino winning the bet is = 20/38
which comes out to be 0.5263 or 52.7%
House edge = probability of casino winning the bet - probability of player winning the bet
therefore, house edge comes out to be ~ 5.4%
What it means to have an edge over the player?
It means that whenever a bet of ₹1 is placed the house is going to win ₹0.054. So, if bets worth of ₹10,00,000 are placed then casino is going to win ₹54,000.
In other words, If 1000 bets of ₹10,000 each are placed then casino is going to win 52.7% of them and loose 47.3% of them which means it is going to win 527 bets and loose 473 bets
Net gain of the house = 527 * ₹10,000 - 473 * ₹10,000
= ₹5,40,000
That is the reason house always wins !
Now you may ask very similar to a gambler, a trader is also putting his money on the line and sometimes he is losing it and sometimes he is winning it. Well yes, trading is also very similar to gambling. In fact trading is gambling. But there are 2 main differences:
In trading, a trader can develop his edge by learning technical or fundamental analysis and can only put his money on the line when the probability of his edge working out in his favor is very high with a trading plan which has a stock screening process, strategy with positive expectancy, entry tactics, rules for risk management & profit booking, position sizing with a defined risk etc. In short, exploiting repeatable patterns in collective human psychology gives us high probability outcomes which gives us a statistical edge in the stock market.
In a casino if a gambler finds the edge and somehow starts beating the casino. The casino's management will force him to quit or throw him out. Else, they will just go bankrupt if they let the player keep on playing who has figured it out. But in the stock market if you start winning and pay your taxes well then nobody can force you to quit. You can play there till eternity.
How can you become the house?
Until now, we learnt that probability of a player winning in American roulette is 47.3%. But in stock market the scenario is even worse. According to the Securities and Exchange Board of India (SEBI), 93% of individual traders lost money between FY22 and FY24.
Because of two major reasons:
Instant gratification When a stocks moves in our favor, we have the tendency to book profit because of the fear of losing out on the gains.
Fear of losing money When a stock goes against us, we keep on holding it in the hope that it will bounce back, may be some good news around the corner will push it upwards. We don't cut the losses when they are small and end up sitting on a big loss.
To become the house, we should do the exact opposite. We should book the small loss and let the winners run.
Know your mathematics
To be the house you should know your mathematics, assuming you have a strategy based on technical analysis or fundamental analysis or combination of both with a positive expectancy which means over a period of time it makes money. Here is how you should record your transactions in the stock market to operate like the House.
Before I explain my way of doing it, please be aware that this is not the only way. I am making an initiative to germinate an idea in your mind. You can further build on it. For me, every part of trading or investing is ever evolving. I am always on the look out for new concepts or ideas to improve.
I use a simple excel sheet having below columns
Parameters | Description | Possible Values |
Trade No. | A unique number to track the trade | number, character or combination |
Stock | Stock symbol or name | character |
Status | Current status of the trade | open, breakeven, loss, profit |
Type | Planned holding period for a trade | intraday, swing, positional |
Strategy | Event that triggered the buy decision Technical- chart pattern, trendline, indicator etc. Fundamental- earnings, order book, merger etc. | character |
Buy Price | Price at which the stock is bought | number |
Sell Price | Price at which the stock is sold | number |
Stop Loss | Price at which you will exit in case the trade goes against | number |
Buy Price-Stop Loss | Delta between buy price and stop loss | number (formula) |
Initial Risk | Fixed risk amount decided while taking the trade | number |
Quantity | Number of shares bought | number (formula) |
Buy Value | Total money invested in the stock | number (formula) |
Sell Value | Total money raised after disinvestment | number (formula) |
Profit/Loss | Profit or Loss made on the trade | number (formula) |
Profit/Loss(%) | Profit or Loss made on the trade calculated in percentage | float (formula) |
Reward : Risk | How much money is risked to make the profit | number (formula) |
NIFTY 500 Index above 10 SMA | Awareness about the market environment | yes or no |
NIFTY 500 Index above 20 SMA | Awareness about the market environment | yes or no |
Buy Date | Date when the stock is bought | date |
Sell Date | Date when the stock is sold | date |
Days Held | Total number of days the stock remained in the portfolio | number (formula) |
Remarks | Thoughts while taking the trade- buying or selling | character |
Chart Link | Reference to the chart saved on the drive | link |
Fig:3 Parameters recorded for post trade analysis
After you have understood the meaning of each parameter and how I describe it to derive insights in post trade analysis, you an download the template from here.
Chart images are stored on a local drive and the path to that is stored in the excel sheet in the 'Chart Link' column. Below is the screenshot for the reference.
On the chart, I mark the entry candle with the buy price, and the exit candle with the sell price. Along with it I also sometimes scribble the chart with the mistakes I did whether it was an error in technical analysis or risk management or psychology. The idea is, whenever I come back and review my past trades I should be able to separate out specific areas where I need to improve.
This brings us to the closure of this blog. I hope you enjoyed reading it as much as I enjoyed writing it. If you liked what I wrote you can become the part of Eight Figr League and know the pulse of Indian and US stock markets, get daily updates, learn fundamental and technical analysis, connect with me over video call.
You can also connect with me over LinkedIn and X(Twitter). You can also watch me speaking on YouTube about trading, investing and mindset. I'm a student for life, so don't hesitate to send over your views or sources to help me enlighten myself. If you are a beginner and want to learn how I do what I do. The below series of blogs will help, to be read in chronological order:
Thank you for your time. Have a great week ahead in creating sustainable wealth!
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