I have just been reading ‘Beat the Dealer’ by Edward Thorp
where he describes his system for beating the casinos at Black Jack.
The book was written in 1962 and in order to find their mathematical edges
they had to use a powerful mainframe computer.
Within the book he talks about the edge that stock market traders have
when a strong move is present,
also that there are repeating patterns in the market that provide an edge.
Another edge that traders have (which is not mentioned)
is that they can wait until their edge is present before they have to risk any money!
Just thinking about that should curb the urge to over-trade and bet on less than optimum set-ups.
By taking any trade where there is not a clear and present ‘edge’
the trader is wasting their main trading advantage.
In his book Mr. Thorp describes the mathematical edge of each part of just one of his strategies,
thus the first leg of a strategy may have an edge of 1% and the second leg of the strategy may increase the edge to 3%.
He knows precisely what mathematical edge each part of each strategy provides.
So how can this thinking be applied to trading?
Well, it means that we can pick apart our strategies into their separate components
and back-test each rigorously to find out what the edge is taking into account the correct market conditions.
We then use this information to reconstruct our trading only taking the most powerful high probability trades.
I recommend reading a few books written by professional poker players
just to get the mindset even if you have no intention of playing the game.
This probability mindset is ideal for the trader and can only increase appreciation of what a marvellous opportunity is provided by the markets.