Editor's note: As the bull market charges on, you want to stay "in the game" – the smart way. That's why in today's Weekend Edition, we're taking a break from our usual fare to hear from Ten Stock Trader editor Greg Diamond. With his trading expertise, he offers incredible tools and strategies to profit from volatility.
In this piece – adapted from a June 2023 Weekly Market Outlook issue – Greg explains how two ideas from a professional gambler can help you reduce your trading risk... without turning into a gambler yourself.
My college roommate, Steve O'Dwyer, is one of the best poker players on Earth.
His career earnings in the card game surpass $35 million.
When poker became popular enough to be broadcast on ESPN more than 20 years ago, he and I got hooked... We'd play $5 "hands" on Thursday nights on the East Carolina University campus.
Now, while I enjoyed the game, Steve took things to an entirely different level.
He bought and read every book he could get his hands on and became obsessed with each facet of poker.
In fact, after we graduated and most of our friends got jobs in traditional industries, Steve booked a one-way flight to Las Vegas.
We thought he was crazy.
After some initial ups and downs, Steve proved to be quite talented in the poker world. Going from a broke college kid playing $5 hands to a multimillionaire is a big accomplishment.
I'm happy for my friend. He put in the work, cast aside the doubt and the haters, and lived his dream. Not many people can say that in life.
I tell this story because poker and gambling are often closely associated with trading. But I always provide the same insight to those who make the comparison...
If you're reckless and trade with no strategy and no discipline, and you don't manage risk then, yes, trading is very similar to gambling.
But professional traders always employ smart strategies and risk-management tactics. They also exercise patience when needed to make sure they don't cross over into the gambling mentality.
Longtime Ten Stock Trader subscribers are familiar with my trading strategies... I always provide position-size recommendations and stop-loss levels.
I also constantly update readers on my game plan in relation to our technical strategy. I don't trade just to trade... That would be gambling.
But interestingly, poker does provide some relevant lessons for traders...
Today, I'll share two important insights from my friend Steve to help us better understand good trading strategy. Let's get started...
Years after Steve and I graduated from college, I traveled to Las Vegas to visit him. By this time, he had won a few poker tournaments and was climbing the earnings list.
Naturally, we hit the poker tables after I arrived.
But I also picked his brain about a few key mistakes that many poker players make... And interestingly, everything he described aligned quite well with professional trading.
On that trip, Steve provided two valuable tips that I want to share with you today...
First, too many players play way too many hands.
Steve admitted that poker is a grind and many lose patience with the effort... They only want to experience the excitement of winning.
But the odds suggest that "good hands" don't come around often, so you should only play when the odds are in your favor.
The same thing is true in trading.
I can't tell you how many e-mails I've received lamenting the trades we could have made. But overtrading can be detrimental to overall trading success.
These mentalities, and the type of investment behavior they cultivate, explain why a lot of traders fail.
Yes, there's always another trade coming your way, just like there's always another poker hand to be played. But if the odds (or, as I say in trading, the "probabilities") are not aligned with your strategy, you won't benefit. In that case, you shouldn't execute the trade.
My "favorite" e-mails come from folks who believe they don't have enough open trades at a given time.
The name of my trading service says it all... The "Ten" in Ten Stock Trader means I don't like having more than 10 open positions at once.
If you bet on too many hands in poker, you're likely to lose. The same thing applies to trading options... If you buy too many options, your capital can quickly evaporate.
The bottom line is, you shouldn't overplay. Follow your trading strategy and manage your risk... Patience will lead to success.
The second tip Steve shared with me during the Las Vegas trip is one of the more popular insights among poker players...
You have to know when to "hold" them.
That means if you have a winning hand, hold the cards and bet accordingly. You should do the same thing in trading...
For example, back in March 2023, I forecast a bottom in many stocks and sectors.
After that point, we accumulated shares of triple-leveraged exchange-traded funds and stock shares with long-term upside. We held them for as long as we could.
However, when market conditions changed a few months later, we exited most of our core positions to lock in gains.
When stocks are grinding higher, it can be frustrating for bears, but good for bulls. That's where Steve's second tip – knowing when to hold them – pays off. You want to wait for a pullback to pull the trigger... and then let your winners ride.
Right now, my research shows we're very close to a major inflection point in 2024... with a lot of volatility as we move into September, October, and November.
So be ready to apply these important insights from one of the best poker players in the world to your game plan... to prepare and profit over the next few months.
Good trading,
Greg Diamond, CMT
Editor's note: Right now, Greg says the "October Surprise" that tends to come before White House elections is poised to arrive early. This historic turning point is likely to begin in a matter of weeks... And when it does, it could upend the political landscape – and open a rare investment opportunity.
Times like this have given investors the chance to double their money over and over again. So make sure you're ready... Check out Greg's online broadcast on August 27 to learn the full details. You can sign up for free right here.
