Full-time stock trader. Follow me here and on 12631
Joined Apr 1, 2010
8,861 Blog Posts

Be the Casino

One of my current longs inside 12631, FNP, came out this morning with positive guidance. The stock is popping around 10% this morning.

Now, on the other side of the coin, one of the most aggravating parts of trading is when you are long (or short) a stock, have the wind at your back in terms of technicals, are cognizant of when earnings or big events for the firm are scheduled, and then you get hit with pre-announced news which the market interprets as a shock and accordingly re-prices the stock aggressively against your favor. That precise scenario occurred for me last year when I was long SAH, ready to play a textbook short squeeze breakout higher in the auto sector. They pre-announced disappointing earnings, the stock gapped down 7%, and I quickly cut it for a loss after making prior gains.

As frustrating as it may be, there is literally nothing you can do to defend against surprise news or announcements which the market deems overriding the prevailing technical trend. While most macro news and macro events tend to be interpreted by the broad market in favor of the prevailing technical trend (if there is one, at the time), that is not always the case, and especially not so for individual issues.

As a result, becoming desensitized to the results in favor of emphasizing the process is correct. If a cold streak of unlucky bounces comes, then it comes. If a hot streak comes and goes quickly, then so be it. Over the long run everyone who participates in the market will see some incredible strokes of both good and bad luck at various times.

Just as the casino does not get flustered when some high rolling whale comes to town and crushes them at the very high end blackjack table (in fact, they entice the “winning” wealthy gambler to play as much as possible with free rooms, meals, etc., as math is in their advantage over the long-term), so too should you not allow any short-term results (good or bad) to undermine the process of finding the best technical setups, managing risk, and practicing sound portfolio allocation. And that is what gives you the slight mathematical edge (it is never a big one, for anyone)¬†over the long run, just as the casino has.

It is only when you allow relatively short-term results, emotions, and a hot or cold streak to negatively influence you causing a drift away from your core process and discipline that you see the small edge in the market diminish quickly, transforming you from being the casino into just another gambler about to lose his shirt, and then some.

Be the casino.

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  1. JohnH

    Great comments…putting this one in my evernotes to read often

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  2. Bozo on a bus

    Chess, what do you do if you see an unexpected gradual decline prior to an announcement? 1 to 2% a day over a couple of days. I’ve seen it happen a few times – usually meant bad numbers were leaked and people were getting out.

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    • chessNwine

      Just to clarify–I usually sell before earnings. I am referring in the post to surprise pre-announcement. Regarding the decline into the news, a lot of that depends on your entry, stop-loss placements, and risk tolerance. As often as it seems like the markets knows beforehand, oftentimes it does not, which is what causes such sudden, sharp moves afterwards.

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