A Story About Vegas.
I lied. It’s actually not wild, I was in bed at about 10 last night because this is who I am at this age.
Plus, I’m a degenerate for the markets and the $SPX was setting up the move it did today and I wanted to wake-up proper.
I’ve never been much of a gambler. I like Poker for certain reasons which I’ll get into but I don’t really like gambling too much.
The odds are not in your favour and the asymmetry in the risk is not really there either.
That’s how I want to explain financial products to you reading this.
Earlier this week I gave a webinar to Traders Exclusive. It was my first webinar in a few years and I got to tell my story and my journey on Wall Street and ultimately as a coach teaching others to do this properly and without it confusing them.
What I always learn with traders that struggle to do this is at the foundational root of their cause it’s how they perceive the markets at large.
What I mean is the products they use or don’t use to produce alpha.
Or, and this is a big one, not using the products the intended way that gives them the proper leverage.
I am going to expand on that in this post.
Vegas is Wall Street….
Financial products are like the products Vegas puts out for you to mess with.
Some have shiny lights and noises some are more subtle.
You have the high-roller rooms (Credit Default Swaps and Swaps Trading for the hedge funds and such).
All of these machines and games have rules and structures in them.
So do the products on Wall Street.
You have Index Futures, Equities, ETFs, Equity Options, Forex, Commodities and much more.
The way I want to break it down is like this.
I want to look at the Casino floor through the same lens as I look at Wall Street.
a) What products/games have the best asymmetric payout potential?
b) What products/games can I gain the most edge in?
I don’t really want to pay too much BlackJack because its basically 1:1 odds and if lucky you make a little more on 21. But basically, it’s not an asymmetric game.
I sort of think of futures like that. Futures don’t really move $100 points (normally) in a day. The usual moves are $10-$20 points so you can grind it out and make some good coin.
Then you have slot machines. Some are cool because of the bonuses or jackpots which give you asymmetry. You put a little coin in (especially in high-limit) and you might take some losses but the payouts are big.
I equate this to equity options and futures options - but obviously with a little more to that.
The point is most that come into trading just trade anything without really look at the value propositions of the products they trade. They don’t asses the risk, the capital required, the asymmetry.
Never in my life have I traded Forex. Why? Because the asymmetry in those markets is terrible compared to other markets and second, there are TOO many variables. (I am sorry for you YouTube FX gurus, nobody believes you’re 21 with a Lambo from Forex anyway)
So you want to play the games/markets that favor your edge. And I am going to tell you this there is one foundation to most markets (excluding value investing/deep short selling research):
That edge is understanding price-action, multiple time frame analysis and context.
Once one can do that they can play any game in the casino. And once you can do that then you can pick the BEST games that favor you as the trader.
I mean the ones where you can find asymmetry, more edge and less risk.
This is why I’ve never personally traded or taught:
Stock day-trading (edge is terrible - too much work for too little $$$)
Forex (too much work for too little $$$)
Penny stocks (just pure gambling)
But then you have Poker.
It’s less against the house and more against other players. It takes skill and there is some luck involved but there is a lot of learned skill.
I equate this to active-trading and portfolio management the way we do it.
We can look at different hands (trade scenarios) and make judgement calls on said hands:
How to size a position (or bet it)
When to fold it
When to push it
Trading and poker are more similar than to any other machine/game on the Casino floor.
You’ve got to manage your bankroll, measure risk, judge scenarios and sometimes when you have a locked-hand you can get really paid out: same as an asymmetric futures options or equity options trade.
For most struggling traders playing poker with your capital is the best way to think of this.
If you are trading with $10,000 you want to
a) Maximize those dollars without using margin to go buy stocks
b) Judge trades where the asymmetric payout benefits you
c) Grind it out to build said bank-roll
So with me and my trading it’s not as if I call myself only a “futures trader” or “an options trader” - here are some of my rules.
Deployment of Capital
This fits into this discussion. How we deploy out capital matters and I don’t just mean trying to do this silly R:R ratio stuff that OTA instructors and so many like to tell people to do.
Not every trade, especially with futures, requires you to sit there and spell out the risk-reward. Sure, if there is a long and MAJOR resistance to short is 5 points away you should’t take that long but you don’t need to sit here and lay out each idea with R;R that takes hours.
Futures are a fixed known. We know how they move and about the average amount of movement so our gains are fixed unless we do what?
a) Trade more contracts (a big danger for struggling traders)
b) Learn to use SPY puts/calls to structure the ideas (this gives you asymmetry)
But how we deploy capital at large matters.
I had a discussion in our chat room today about housing stocks.
I am 50/50 on them and I also made a video on them here.
The point is I like them. The other point is this;
Why should I put my CAPITAL TO WORK THERE if there are better places to put it that provide less of a 50/50 feel on the analysis?
I wouldn’t.
This is the same as you walking into a Casino and assessing the games.
Your money matters and how, where and why you put it to work matters.
There is never enough emphasis on this in education. We only talk about charts and trading set-ups.
Anyone can do that. The thing that sets apart the players that run the Casino are the ones that can understand the things I explain here.
Learn that, then the rest follows.
This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.
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