Saturday, October 6, 2007

Stock Picks 101 - Certain Profits in Uncertain Times

Join me for an instructive mental exercise.

Lets imagine youre the owner of a casino. I was going to say successful casino, but this is so self evident that it doesnt really need mentioning. Everyone knows casinos are successful because the house has the statistical advantage, right?

Now imagine youre watching the people going into and out of the casino. Your security system happens to be very good, so you know exactly how much money each person brings with them into the casino and how much they take back out.

Just now you see a really happy looking person who just won $25,476 at the slot machine leaving through the front door. Does this bother you? No, because you know that, in the long run, youve got the edge.

Just as you think that, you notice somebody slinking out the side entrance after maxing out their credit cards to the tune of $37,544. Do you take a special delight at having relieved this poor unfortunate individual of all that cash? You shouldnt, because its all in the system. Its all in the odds.

Now, lets look at this from the perspective of YOU, as a professional trader engaged in stock market trading. You shouldnt EVER be in a trade unless you know you have an edge. Theres a paradox here, because obviously you can never be sure that any given trade will be a winner, so you always need to have a system in place to manage your losses.

Like I said, you should never be in a trade unless youve calculated that the odds are in your favor. Usually, this is because the CLEARLY AND CAREFULLY DEFINED system youre trading has a credible historical record that shows that the odds are, indeed, in your favor.

If the odds are in your favor, then guess what? You ARE the house. As you work your system, you should not care if any given trade ends up hitting your profit target or closing out at your stop loss.

Why? Because you know the odds are in your favor. Each trade, win or lose, brings you one turn of the crank closer to that long run average that will be in your favor.

As you can see, theres no point in being emotionally invested in being right or wrong with any one trade. You are just working your system. Each step, each trade, each stock pick, contract, option, etc., in time, just becomes a blur on the way to your eventual success.

So here is the paradox: You are totally uncertain of the outcome of any given trade. However, if your system is sound, and you stick with it long enough, you will certainly profit.

The next time you find yourself getting giddy with the thrill of a long string of winners, or despondent because all your trades are going against you, just remember: YOU ARE THE HOUSE. And the house always wins, in the long run.

With Customers in more than 70 countries Doug Newberry enjoys his position as the Editor of the "Market Toolbox Newsletter" and Host of the "Market Toolbox On Demand" online radio show. The Investing Systems Network specializes in stock market trading tools and portfolio management software.