RetailTrader Tries His Hand At Gambling

I just need one good hand.. to wipe the table clean!

During the Chinese New Year festivities, I was playing a card game "In Between" with my friends. For the more inquisitive folks, you can check out the rules here. Very simply, each person will take turns to be dealt with a pair of poker cards. And you decide how much money you want to bet that the next poker card you draw will be a number that is "in between" the first two cards. If you win the bet, the money is yours and if you lose, you have to cough up money into a pot. You lose double your bet if the third card you draw is the same number as any one of the first two cards.

I didn't actually know the game was also called Acey Deucey (what kind of name is that?).

As a retail trader I gamble with a plan in mind just like I approach trading. I do enjoy gambling sessions because some games can actually be good practice for trading. In the case of In Between, it teaches you how to size your positions accordingly with the probability of your hand of cards you receive. In other words, if you get a good pair of cards, you can calculate what your odds of winning money are, and then decide how much you want to bet accordingly. For a set of cards that gave the absolute best odds, I would decide what was the maximum loss I could stomach (in the event of a freak accident) and work backwards in determining what my wager was. The trading equivalent would simply be committing to a larger position for a higher probability trade, and sizing accordingly to your risk management rules.

I also enjoy In Between because I had never lost money playing the game before. Is it down to luck or my amazing system? ;)

Interestingly as the pot of money began to grow larger and larger, the stakes got higher and my friends began to get emotional. Even I began to adjust the maximum loss I was willing to take to take into account the "inflation" of the money pot. Bets began getting bigger and bigger. Even though we started with a minimum bet of just 50 cents, it was not long before the first 2 dollar note appeared in the pot, followed by 10 dollars, then 50 dollars. Some of my friends even started betting in hands that gave less than 50% probability, and even in such cases bet beyond the 50 cent minimum bet. Some of my friends bet based largely on feel and won money. I lost 28 dollars but I had a lot of fun in the process. You should have seen my face for one bet where I plonked 64 dollars for a very high probability hand, and ended up losing double (i.e. 128 dollars)! I will simply view this as a good bonding session and the equivalent of paying to watch a very entertaining movie that was at the same time educational!

What was the moral of the story? Sometimes you can go into a trade or game with best laid plans and execute them to perfection, but still lose money even though you have done your homework and calculated the probabilities, etc. This is because while we can create a system that gives us a positive expectancy (i.e. over a infinite number of games, you will expect to win), the problem with gambling is we don't end up actually playing an infinite of games, and it takes time for the positive expectancy to materialise. And in the meantime, a freak/accidental heavy loss can set you back by a lot. Sounds a bit like trading huh? You can have a best laid plan and execute it to perfection, but still lose money. No choice, you just have to suck it up, play good defence and ensure you are never wiped out in terms of capital, and play the next trade well again. Think like a casino. Casinos win money in some games, and lose money in some games. But they know that they will always win over an infinite number of games and don't lose sleep over losses. That's how it should be for trading (and gambling) as well.