Casino Mindset: A Way to Improve your Profitability!

If you are one of the struggling traders/investors in the stock market and are looking for new strategies, tools, software, advisory services, etc. in an attempt to become profitable then you are probably heading in the wrong direction. One of the most important things that separate winning traders from the struggling ones is the ‘mindset’, apart from robust risk management. Mindset is the whole game that you need to concur to see your portfolio in green on a consistent basis.

So what exactly am I talking about here? Well, there are many things to address when talking about the trading mindset, but here I am stressing upon one of those - Thinking in terms of ‘probabilities’ which is exactly what a casino does. This might sound funny for now but hang on! Let me get straight to it.

There are a ton of similarities between casinos and stock markets. In both the arenas, traders/gamblers bet their money in an attempt to multiply it. The bets placed in a casino have an uncertain outcome just as a bet placed in the stock market, yet it's always the gambler who loses and never the casino (on a larger time frame). You would have heard 1000s of stories of traders and gamblers going bankrupt or losing a fortune and rarely a few stories that have made these traders/gamblers an overnight success. However, you never would have heard of a casino going bankrupt! Maybe once or twice, at max!

The point is, when a bet placed in a casino always has an uncertain outcome then why its the gambler who always loses? Again, I am not talking about a few instances where gamblers have made a killing, but the overall long-term scenario. The answer lies in the way a casino thinks and operates.

Every game a casino offers has a slightly higher probability of winning (in the favor of the house). Meaning, that if you think you have a 50% chance of winning in any of the games of a casino, you are dead wrong! To give you a simple example, there are 18 red and 18 black numbers in a game of roulette, giving you ‘seemingly’ an equal chance of winning. But wait! There are two zeros as well (in American roulette) which marginally reduces your probability of winning. This slight probability of your loss becomes the ‘edge’ of the casino. Even though this edge is of a minor 1%, meaning a 51% chance of winning for the house, all it has to do is keep on playing because it’s got a statistical advantage over you. In other words out of 100 bets, the casino is poised to win 51. This whole funda of a slight ‘edge’ never lets a casino lose.

In other words, it is the ‘probabilistic’ mindset that keeps a casino always wins. This is the only reason a casino never tries to predict the outcome of a game but still wins in the end despite having an ‘uncertain’ outcome because it's been countered by a ‘certain’ edge. The house knows it already has an edge and might lose consistently for many games but as more and more games are played it's bound to win (due to its proven edge). Although, it can never predict which exact games it will win out of 100 but winning any 51 at the end is all that matters. The more the number of games played, the better the edge plays out due to the law of averages. 

This is exactly what you need to replicate in your trading. Make/find a system that has an ‘edge’ and then keep betting on that system and the edge would automatically materialize. The edge of your system can be proven through backtesting. Once you got the edge, you don't have to worry about which trades you will win or lose, because, after a number of trades, your edge will start playing out. 

Note: Edge is not about a higher accuracy, meaning if your system wins 60% trades then you have an edge. It is a combination of accuracy and the risk-to-reward ratio. In simple words, how many times you win coupled with how much you win on winning trades and how much you lose on losing trades. Both these metrics combined define your statistical edge.