Mark Douglas talks about having a slot machine mentality as a trader. Suppose you were designing a slot machine that resembled trading. It might have 4 or 5 layers of probability, randomness or choice. When you sit down in front of the machine, the trader’s slot machine starts twirling until it comes up with a signal. At that point the trader has a choice of putting his coins (his risk) in – and you don’t have much time to do this or it starts twirling again. There is a judgement here as some signals are for a small payout (scalps) and other signals are for more – and in addition to that, the more risk you put in (lot size) the greater proportion the payout adjusts for. So the first choice is to play. Then there is a random factor in the signal showing up, this is no problem, it is just a matter of time. When the signal comes up, there is a choice as to risk size. So there are 3 layers of probability, randomness or choice so far. OK, so now you have put your coins (risk) into the slot machine. Everything stops and one token/coin comes out. It is weighted so that “heads” (a winner) comes up a certain percent of the time. The slot machine gives you a specific coin for the pattern that is showing. For a trader this is the same as back testing. For example, perhaps a small payout (scalp) would have a coin weighted for a higher % of heads (wins). This is a 4th layer of probability, randomness or choice. At this point it is straight forward. You flip the token or coin and heads you win, tails you lose. But it’s not that simple. Suppose you design the machine so that any payout just trickles out into the tray below. And the tray is hinged so that when a certain amount of weight is on it… it ‘trips’ and the payout drops out of sight back into the machine. And further, the amount of weight required to trip the tray randomly changes – totally unknowable. So at any point you can lock in the amount of payout you see, but if you do -- that is all you get. A 5th layer of probability, randomness or choice. Hummm. I have the impression that many professional traders would keep it simple and ignore this last choice.
Identify the risk Accept the risk Systematically take profit ========= Allow neither losers nor winners to have an affect - most times money will be left on the table Gives us something to shoot for next trade RN
Thank you RN. I think that "have a plan to take profits" was one of the things MD frequently said that took longest for me to grasp. It seems so obvious, but I didn't understand it in context. It is still turning around in my head some. If you are trading multiple contracts it is not so hard. Systematically take profits! If you are only trading one lot, it's more the target or the mental stop -- one or the other. I guess that is a plan also, but not what MD is usually talking about. In my analogy above I was thinking more about traders who add-on. The analogy breaks down there... BUT I do think this analogy gets to MD's point of seeing & accepting risk, of thinking in probabilities. Getting away from thinking one's technical or fundamental analysis has anything to do with the results of an individual trade. .............. Aside from that -- would you play this version of a slot machine in a casino? Do you think this analogy or the actual experience in any way could help a beginning trader "get" the point of MD's slot machine mentality?
The shorter the trading / analysis period, the closer towards 50/50 ( random ) that you get. Keying ( equity ) investment positions and analysis off of the U.S. credit / economic cycle ( long term ) shifts the odds towards more "favorable".
Hi James, I have young relatives who sometimes ask to learn how to trade. None have stuck with it yet. I really like Mark Douglas as a place to begin. He says things differently than I do, but he was able to communicate with a lot of people. I keep thinking I can do a better job on my part -- the above analogy is an attempt at the same. It is often said that beginners try to trade a minute chart, thinking they will gain experience. Many with experience say an hour chart is actually easier to trade. Your statement above may go to that POV.
When I back test, I do it with a one lot in mind, cause if you can't make profits with a one lot, more of them not going to help. In 60-75 minutes of ES trading, I am doing 10-40 trades, but each trade I put on is a signal and it uses different Dome with it's own set of rules. I average down on every trade and that backtesting was done separately from original system except money management of all my systems are the same for day trading cause it is based on Time stops and number of bars does not matter whether one minute or sixty minutes. And if I get five signals on one bar, I do each as it is only signal I have, meaning I am doing one for each Dome, I don't think at all I have so many more contracts, each is separate. In 38 years of trading, I have found two traders, both is same week, who can do long profits in day trading, can sit there entire day and get entire swings, you have to have the personality to do this, I don't. I want to get in/out quick in anything less than five minutes, but sixty minute systems can be days. All depends on minute charts you trade, I prefer sort of random cause I get 2-3 points and I am out. But all based on years of back testing, what can I do not to lose and still pull in profits. I know the folks who gamble for living all do video poker, play 500 hands an hour seeking Royal Flush, they know what to keep on each hand, do it in their sleep. Guess what, if you can't read a chart, KNOW your rules and know it like in your sleep, you will lose. I think beginning traders are the best if they willing to work their rear end off and realize you going to compete with the best who been doing this for many years, but those who come into our arena and think it piece of cake will always blame someone else than looking within and saying they failed cause they don't know how to read charts and don't have the answer before the question. I never cared much for MD books, I read them along with others who sell mental aspects of failure or their idea of overcoming it. Most never trade. I have believed in hard work but only after many losses, you either lose and walk away with tail between your legs, or you learn to program and start testing, perhaps it was always just the act of programming that I had to become more strict on myself, doing the same things over and over, like playing video poker, even when trades looked like sure loser, I took them, it is numbers game and you know if you stick to your Trading Plan, you should come out profitable.
Thank you Handle. Your posts are always fascinating and insightful. I am grateful for your experience. And yes, once you get to where it is just a numbers game... everything about trading is different (emotionally) and if you are strict and stick to your plan... you should come out profitable. So true.
Hey Hooti Mark also used the analogy of gambler (trader) & casino (the house) - and that a trader should trade like the house..., not as a gambler Which is what I subscribe to..., and what I absolutely believe a trader should adopt ============== If I were pressed to operate under the gambler / slot machine scenario- I'd take take on the roll of the slot machine (which is identical to trading as the house) RN
obviously... Donald Trump. Seriously, if you think this analogy has potential as a learning tool or as a thought in passing... at all; feel free to fill in some of the blanks or clarify the limitations... At any rate, I am done for the day--