by Keith Cotterill

Of course it is impossible to have total knowledge or complete data about any given situation.  There will always be noise, chaos and unpredictability which is beyond the control of anyone.  No one, not even the professional traders, can have 100% certainty.  Absolute knowledge in any market is impossible.  However, as long as we are always prepared to obtain as much knowledge as we can, then we will have a firm foundation for all of our trading activity.  It is important that you obtain the knowledge you need, and know how to recognize signals which indicate the professionals are taking their profits.

As you begin to follow the markets you will come to recognize the activity in your charts and data.  In a matter of days or weeks from now, the underlying moves of the market will become obvious.  The points which mark the change from one kind of market (a bull or buyers market) to another (a bear or a sellers market) will become immediately recognizable.  Once confirmed by the rest of your data, you can then identify the professional sentiment, and therefore the next trend in the market.

Always remember…

If it is repeatable, then it must be predictable.

If it’s predictable, then it must be tradable.

If it’s tradable, then it has the potential to be profitable.

Like a film you have seen many times before, you will know the cues and the course of events so well that you can second guess what is about to happen.  Instead of fighting against the professional money you will be able to trade with it!

By pure luck, a couple of years ago I was channel hopping on the radio late night when I came across an Open University program which to me summed up the difference between gambling and speculating and why the markets offer the best chance of success.  Its subject was probability.  And as the academic began his introduction, I was fascinated by what he had to say.  Quickly, I noted down some figures.  I’ve reproduced them for you in the table below:

The Loser’s (and Winners) League Table
GameProbability of Success
1. Football Pools-70%
2. Horse Racing-24%
3. American Roulette-5.26%
4. European Roulette (Number Bet)-2.7%
5. Black Jack (Amateur Player)-2%
6. European Roulette (Red or Black Bet)-1.35%
7. Black Jack (Expert Player)-0.5%
8. Black Jack (Card Counter)+1%
9. Stock Market & Other Financials+11%

But notice that, out of all of these speculative pursuits only card counting in the game of Black Jack and the stock market come out positive!

However, be warned.  Just because the stock market and card counting come out on the positive side overall, this doesn’t mean that success will be automatic.  What the statistics are saying is that, out of all games of chance, the card counter in black jack and the stock market offer you the best possibility of coming out ahead.

So what is it that allows the card counting black jack player and the professional trader to come out ahead?  What is it that gives these two games of chance the ‘edge’ over all of the others in the table?  After much thought it occurred to me that all of the other games don’t have…

All other forms of speculation (ie: gambling) are void of memory.  Before each hand is dealt, each throw of the dice, each spin of the roulette wheel, your odds of making a winning or losing bet are the same.  All things being equal (no tampering or rigging), each outcome is equally probable every time.  The odds do not change.  They do not get better.  They don’t get worse.  They stay the same.

As to the National Lottery: once again, it has no memory of the previous results. Much time and integrity has been invested into ensuring that every time the balls are called, all 49 numbers have an equal chance of coming up.  The balls are weighed.  The machine is randomly changed.

So, unlike the roulette wheel, dice games, and lotteries, only card games and the markets have memories of the previous results.  It’s the rule of cause and effect.  It’s mathematical logic.  Let’s take a look at that maxim of ours again.  But this time we’ll add an extra line…

If there is a memory of the previous results it must be repeatable.

If it is repeatable, then it must be predictable.

If it’s predictable, then it must be tradable.

If it’s tradable, then it has the potential to be profitable.

Interestingly enough, some of the world’s top traders are also expert black jack players.  They say playing black jack finely tuned and honed their awareness of risk/reward and probability of profit.  In essence they had to develop a strategy if they were to have any measurable success in playing black jack or trading.

Understanding the principles of how this is done in black jack and how we can apply them to the way we view the markets, will allow us to establish, before putting on any trade, whether or not the deck (market) is stacked in our favor.