YTE'S Ben Power speaks with Richard Weissman about his casino paradigm, a psychologically easy way to ride positions and the importance of keeping a trading journal.
Trading appears to be an infinitely complex game. Yet success boils down to a few key principles that are often forgotten in the cut and thrust of market moves and endless streams of information.
Richard L. Weissman has allowed traders to grasp the key principles with a simple analogy: traders need to operate just like successful casinos; just like the huge MGM Grands and others in towns such as Las Vegas, which rake in billions of dollars a year.
Weissman has traded for more than twenty years. For fifteen of those he has been a consultant for traders and risk managers. His first book was ‘Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis’, but it is his latest book, ‘Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House’, that outlines what he calls the ‘casino paradigm’: basically, that a trader, like a successful casino, needs to put the odds in their favour, then relentlessly control risk.
While the casino paradigm is his basis for successful trading, Weissman also explores something casinos don’t have to worry about: psychology. Even if a trader has an edge they have to (almost) flawlessly execute and stay in the game so the odds can play out in their favour.
Weissman is honest about the difficulty humans face to trade consistently, but he comes up with practical solutions – discussed in this interview – to help us overcome our tendencies to fear and greed.
How did you get into trading?
In 1987 I really didn’t know what I should do with my life. My Dad was an equities option broker. He came up with the idea of going on the floor of the AMEX, which traded equity options. When I went down there and started talking to people, it became apparent it was a little rich for me: it cost half a million dollars for a seat.
A high-school friend who worked as a broker for an equity options house said to me, “Look, trading is trading. Get a seat on the New York Futures Exchange.” I did that. I went down to the NYFE where seats were going for $100. It was a bunch of futures traders that had come from other pits. It was a great place to learn. I hung out by the CQG and saw different traders and how they used technical analysis to manage risk, and determine entries and exit points. Not that I made any money back then. I quickly realised my forte was not scalping or market making, so I sold my seat.
How did you progress from there to becoming profitable?
I sold the seat in 1989. I continued trading, but was struggling. The main thing in my favour was I was undercapitalised and was losing very small amounts of money. As I got more experienced I learned how to lose even less; then learned how to become a really, really good risk manager; and finally, I learned ‘positive expectancy’ (profitable) models and started making money.
At the start of book, the question ‘Can someone really make a living as a speculator?’ is posed. Is it possible for an independent trader to trade for a living?
Most people have two things going against them. Firstly, they’re undercapitalised. Secondly, they have a ‘nut’ (regular monthly expenses) that needs to be met through a career that doesn’t offer a steady monthly source of income. Trading does offer income, but it’s very erratic.
In Chapter 11 there’s a very, very detailed questionnaire. One question near the beginning of the chapter is, ‘Do you have other professional time commitments?’ I go on to say the good news for those with other significant time commitments is that there are few or no bill-related pressures impinging on performance...
Excerpted from an article originally published in the May/Jun 2012 issue of YourTradingEdge magazine UK. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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