What Does a Winning Trading System Have in Common with Pro Gambling?

Editor’s Note: Following is a fantastic guest post by Dr. Jack Loftis, founder of ETFSwingTrader.net. It’s a little something different than our typical posts about stock trade setups and walk-throughs. Enjoy!

Stock traders are often accused of just being “gamblers,” especially for shorter-term trading timeframes.

When this happens, we often rush to assure our friends and family that “we are not gamblers—we are traders!”

However, the best, most profitable traders truly are gamblers—talented, disciplined, professional level gamblers.

Professional gamblers reliably make money because they always have a statistical edge that has been proven to work.

Like top stock traders, pro gamblers know their key statistics and show discipline when making decisions within their rule-based systems.

Putting the odds in your favor within a game of chance

Personally, I played blackjack on a semi-professional level for several years.

I did not make enough money to support myself—but I usually made enough profit to pay for my trips to Las Vegas, Nevada.

The key similarity between card gambling and stock trading is that you are applying a skill to a tested strategy with a statistical edge—in an arena with a huge amount of chance.

In card games, chance is the random order of cards in the deck.

In stock trading, chance is the unpredictable movements caused by other buyers/sellers, news events, etc.

In both cases, chance is out of your control and will largely affect your results in the short-term.

But the statistical edge that enables traders to generate consistently profitable results over the longer-term comes from having a proven trading strategy that works—andhaving the strict discipline to follow it.

The psychological challenge of “chance”

According to Malcolm Gladwell, author of Outliers: The Story of Success, becoming a master of any skill requires roughly ten thousand hours of practice.

However, higher levels of feedback can enable some skills to be mastered faster than others.

If you want to improve your skills at riding a motorcycle, you get quick and decisive feedback that immediately lets you know you are exceeding your skill level.

I have nine hundred hours of experience piloting small, private planes hours flying small private planes. If I make a mistake when flying, the plane (and usually my passenger) gives me immediate feedback.

But with stock trading (and blackjack), 60-80% of your results are out of your control due to the element of chance.

That’s why it can be a real psychological challenge to manage your behavior on the quest to improve your trading skills.

If you lose a hand of blackjack or poker, was it because of the cards you were dealt OR how you played them?

In stock trading, how many trades do you need to make to know if your trading system is working or failing?

If you have negative trading results for a period, is your trading strategy flawed OR was it just the predictable chance of unprofitable trades in the short-term?

Focus only on what is in your control

Although the price movement and direction of any stock trade is out of your control, becoming a master trader is really about how effectively you manage what is actually within your control.

Professional blackjack or poker players always have a disciplined “system” that defines the correct play for any combination of cards they are dealt.

Likewise, successful stock traders always follow a replicable set of trading rules that defines their trading strategy.

Their long-term profitability is primarily determined by whether or not they are disciplined enough to apply that strategy in real time—with real money and real emotions—in all market conditions.

Is your trading strategy proven to win?

In the early years of my trading, I went through a period where everything I did was wrong.

If I decided to hold a position moving against me, it turned out to be the wrong trade to hold.

If I was quick to exit a trade with only a small loss, it turned out to be a big winner that a solid trading strategy would have signaled me to hold.

I eventually realized my trading needed the same thing that made me successful in blackjack—a well-studied, rule-based strategy that truthfully gave me a statistical edge.

It also needed to be a trading system that won often enough to give me feedback within a month of whether or not it was working.

Longer term investing did not give me the quick feedback I needed. 

Conversely, day trading was just too frenetic for me.

I found my fit with swing trading—shorter-term trades held for about five days.

Swing trading made sense to me because studies have shown that most stock market price movement occurs overnight.

Only a relatively small percentage of significant price movement happens when the market is open.

But I also knew that having the confidence to commit to holding a trade overnight or for several days would require a tested trading system.

Creating my ETF swing trading strategy

While working on defining my trading strategy, I discovered an ETF swing trading strategy created by Larry Connors that was based on “reversion to the mean.”

The general concept was that an ETF moving in a clear direction (either up or down) will revert back to that direction after it retraces in the opposite direction for a few days.

I really liked that this ETF swing trading strategy was already exhaustively tested and fine tuned.

That meant I was beginning with what I needed: a well-tested trading system that would provide me with a statistical edge (as long as I religiously followed it).

Putting my ETF trading system to the test

I began learning that ETF trading system back in 2008.

By 2009, I had tweaked the strategy to perfect my own way of trading the basic system.

With an average win rate of 80-90% on my ETF swing trades, I began sharing my trades on StockTwits and Twitter.

I posted in real-time, during market hours, so that anyone could take the “market on close” trades alongside of me.

I won on 27 of the first 30 trades I posted.

By the time I posted my 100th trade in a row, I had won on 96 of them.

This proved my point that it was indeed possible to implement a high probability strategy that won a huge percentage of trades.

Then, I began “turbocharging” those returns by using leveraged ETFs (and sometimes options) to turn these small percentage gains into significant dollar profits.

I came back a few months later and shared another 30 trades in a row (over a three-month period).

Again, I had a verifiable 90% win rate on my ETF swing trades.

My profile was initially one of the fastest growing accounts on StockTwits (currently have 13,300 followers).

Not surprisingly, many followers protested when I stopped posting those trades back in 2009.

I wanted to continue helping those traders who were making money by following my real-time ETF trade setups, but needed to at least get compensated for my time.

That’s when I launched ETFSwingTrader.net, my inexpensive service that provides you with real-time alerts and details of all my ETF swing trades.

Trading is a journey, not a destination

I found what I needed—a clear, evidence-based strategy which was reproducible and matched my preferred swing trading timeframe.

I discovered consistent profitability that allowed me to methodically add to my retirement plan.

Over time, I have become better at managing myself in this equation.

I became a better and better “gambler” with a proven strategy that gave me a winning edge in the markets.

Still, it’s not over. I’m not “there” yet.

Becoming the best trader you can be is a continual process of learning and being inquisitive about why the same patterns keep working over and over again (but not always).

Although I can not control the element of “chance” with any individual trade, I learned how to master what I can control—perfecting my ETF swing trading strategy. I take pride in my journey to continually become a better “gambler.”

If you too would like to profit from my winning ETF swing trading strategy that has proven itself over the past 11 years, just PRESS HERE to start your subscription now.

You can find out more about my basic trading strategy here.

You may also view more than 5,000 posts and trades I have shared for free on StockTwits over the years.

After checking my posted results, you will quickly know within the first 10 trades if this trading approach is an ideal fit for your style.

Finally, feel free to contact me by phone or e-mail with any questions.

I take great pride in my ETFSwingTrader service, and enjoy explaining to subscribers my rationale for every trade.

“You’ve gotta know when to hold’em….”

Yours in Success,

Dr. Jack Loftis

ETFSwingTrader website
Twitter feed
StockTwits feed

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“If my journey is about understanding luck, about feeling out the boundaries of control, about knowing how to optimize and reclaim power over what you can do while minimizing the perils of happenstance that you can do little about,”

The Biggest Bluff
Maria Konnikova