Gambler’s Ruin

A friend of mine lost a lot of money in the equities. That was right after he boasted, how he had found the perfect strategy to make money in the markets. I just smiled. People think they are smarter than the markets. Think they can outsmart the system. It doesn’t matter that all the intelligentsia tells them to leave trading to the experts. They have to think they understand the markets. They have to take positions they can’t afford. And after they have lost enough, they claim to have become wiser and state something that goes like this.

”Trading is only gambling. You might get lucky on one day, but in the long term you are only headed for ruin.”

Long Term - That’s where I had the problem. What is this long term? Is there a short term too? If so, when does this short term becomes long?  Another adjective used to make you believe that you have learnt something new. My friend traded for a week. So I guess that’s the length of his long term. There was no point in aggravating him by pointing the mistakes in his logic. But I was surprised how easy it was for him to forget the simple concepts of probability.

”When you toss a coin, there is a fifty percent chance of getting a head.”

This doesn’t mean that heads and tails alternate. It just means that if you tossed the coin a large number of times, like say ten thousand, then number times a head comes up would be close to 5000. But it was true only if you tossed it a very, very large number of times. Not a few hundred. Surely not ten times. As long as you were in the market for a very long time there was absolutely no way that you would lose all your money. On the contrary, there would be lots of lucky days coming one after the other and all I would need to do is quit at the top.

It can never be known when a person thinking for a second person would start addressing it as a personal problem. I took up the challenge. I would trade daily for a period long enough to have more lucky days than losses. Below are my diary entries for the period.

Sunday - I have chosen a system provided free by my broker. It is a simple system created by subtracting moving averages. I also learnt about stop loss. I would never have a big loss. I found it funny I could tell when the indicator turns bullish or bearish, by observing for just one day.

Monday – I took a bet. It is a bet and no matter what the probabilities, I am okay with the thought that there is only a 50% chance of winning. The first chance I lost. That didn’t bother me. I was in for the long. I rechecked the system and realised that I had obviously interpreted the system incorrectly. Guess I got the nerves. I tried again. I followed the rules perfectly. This time I struck gold. The system sure does seem to work. I tried once more and again I was right again.   Cool! Just one day and already 2% up.

Thursday – I followed the same strategy for the next few days. I would have surely quit if the system would have given me many losses. But this system is great. I am getting good profits. Seven trades and just two losses. May be I should increase the invested amount.

Friday – Increased the amount invested four fold. Also reduced the stop loss a little. I think I have lost too much on the two trades.

Tuesday – Twice the markets moved through my stop loss and moved back. Stupid stop loss! Would follow a stop loss only in my head from now on.

Wednesday – Market moved up 2%. I am up 15% today! Amazing! In six months I wouldn’t need a job. HAHA! Expect more exclamations tomorrow.

Thursday – Markets crashed. Bad luck! I am stuck with a big investment. This happens. Surely the market would come back tomorrow.

Friday – Still invested. Have lost Wednesday’s profits. But I am sure the markets will be up on Monday. Traders are probably on leave this Friday. I should have a taken a day off too after Wednesday.

Monday – Started afresh with new positions. A very good morning. Made two good trades already. This week I would get back Friday’s loss.

Tuesday – Great day. The indicator isn’t perfect. I have accounted for its flaws. Traded completely without any system Feel free. Made a killing! Up 12% today. I am sure I can predict accurately. Count over 40 trades till now and hardly 10 losses. Those too because of a stupid system. I guess I won’t have to wait for six months even!

Wednesday – Going all in. Doubled the leverage. Also have to go out for lunch. Not really worried as I am sure that I am right. Didn’t get to see my profits materialize. Tomorrow morning should be a big day.

Thursday – Got up late! Just in time to see the market open. Don’t know what happened. For no reason the market crashed. Checked MSNBC - They think it is a system flaw. I got away from the PC. Not in a mood to have a bad day. Anyway the markets would be up tomorrow.

Friday – All trades rejected by broker. I call them, but all lines to the broker are busy. Having nothing to do, I try to check how much profit I have made till now. Probably 40% percent up, except for yesterday.  I check my profits. No tables. Just a message – “All positions closed as you have run out of margin. Deposit $426 to resume services.”

It had taken only two weeks to wipe me out. Luckily, I had put in a just a few percent of my savings. It pained me to realise that I had spent a few months doing real hard work to earn that amount. At least I had learnt so much about life. I wish I had listened to my friend’s advice. Well I guess the only way to know that fire burns is to burn one self.

Jack never again tried to trade. Having no entrepreneurial skills he slogged for rest of his life at his job and retired in a nice house. He occasionally consoles people and teaches the importance of working hard at you job and has them promise that they would never again venture into the markets.