6 That's the way you want to bet

 6 That’s the way you want to bet

In conversation with Larry Hite, a major world money manager, he notes that he didn't consider himself primarily in the commodity business. V/hen I asked him what business he was in, he stated, ‘the good bets.‘ Upon further reflection, he told me that a major part of his success was due to his ability to calculate the odds of winning in each position, and to place his bets (positions) accordingly.

This approach is pretty typical of professional traders, because I have never heard any  non-professional trader expressing such theories. Yet, this is something that the non-professional should consider and learn more about, because it can be of definite help in operating successfully.

The title of this chapter is taken from the following quotation:

‘The race doesn’t always go to the swift Nor the battle to the strong,'

But that’s the way you want to bet.’ ‘Damon Runyon
American writer

What professional traders know, and what the above quotation suggests, is that the best ‘play' is to bet on the favourite. The long shot, if it wins, pays off better than the favourite. But, the point is, the ‘favourite’ in most bets, is most likely to win. Surely, there are exceptions to this theory, and we can all recall instances where the long shot, paying off the big odds, has won a bet‘ But, such situations are definitely the exception. If you are looking for the best consistency in winning, you should consistently bet on the ‘favourite.’ Admittedly, on any one single ‘bet,’ the long shot may have a good chance of prevailing. But, winning just a single contest is not of to the serious speculator, who wants to be a consistent winner over a large number of  bets. And, this is where a consistent adherence to betting on the favourite, will pay ofi'.

As an example. suppose you are betting on a tennis match, or a chess tournament. In both instances, the number one seed is playing against, say, the 20th seed. Surely, the favourite  would have the smallest odds on him, while the long shot would tarry much higher odds, and if   he were to win. the pay-of would be impressive. Yet, the srnart bet would be on the favourite. Any tournament-calibre player could beat the favourite in one, or just a few games. and this could be due to luck or some other circumstance. But, over a full-scale tennis or chess tournament, the long shot can't win on the basis of luck. This is the favourite can be expected to win and the experienced better would probably put his money on the favourite.

What about the time where you. or someone you know, took a long position in the market that was clearly in a major downtrend. or went short against a major uptrend; and the position  resulted in a good profit? ls there a lesson to be learned in this? Does it mean if you consistently bought or sold against the major trends. you could expect to end up a winner? The answer is categorically, no!

I would like to suggest that profits in such anti-trend situations, if they occur, are primarily due to luck, and not to skill or trading acumen. Except for certain specific situations where very experienced traders utilize a strategy of anti~trend trading, one should restrict trading to the basic direction of the prevailing trend:

(a) Buy — minor trend reactions in a major uptrend and

(b) Sell - minoo trend rallies in a major downtrentl.

The following trade is typical of this trading with-the-trend strategy. Consider the case of the March NIKKEI, traded on the Singapore International Monetary Exchange (SIMEX) (see Figure 6.1).

ln this analysis. we shall use the 50-day simple moving average (SMA) versus the closing prioe, as our trend indicator. We shall also take our entry and exit signals from the 9-day simple moving average versus the l8~day simple moving average versus the 50-clay simple moving average:

Buy: close > 9-SMA > 18-SMA > 50-SMA.

Sell: close < 9-SMA < 18-SMA < 5O SMA.

Note: the symbol '>' means ‘greater than.‘ The symbol ‘<' means ‘less than.‘

Examining this daily chart over the period March 1993 to February 1994. we can see that there were five distinct trend periods

1. Uptrend; from March l993 through mid-May 1993. Pricesadvanced from 17,20O to 21,OOO.

Figure 6.1 Daily chart NIKKEI (CASH) traded on SIMEX. This illustrates trends in action. because we have a top through late October, a steep downtrend downtrend through late November and then n gradual recovery to an uptrend through to Marcn 1994.

2 Down-trend; June and July 1995. Prizes declined from 21,0O0 to 19.200.
3. Upu-trend; from June through early September 1993. Prices advanced from 19.400 to 21,000.

4. Downtrend; from curly Septembcr 1993 to early January 1994 where prices declined from 21.000 to 16,000.

5. Uptrend; from January through June: 1994, with prices advancing from 16,000 to 21,700.

Any speculator who traded this market in synch with the five phases as shown above, not only would have been on the right side or the market (except for the two sideways trending periods when he probably would have been whipsawed, but with only moderate losses),

but he would have scored good profits with relative consistency, and with just reasonable-sized risks. Clearly. trend-following trading doesn't tend to buy at the lows or sell It the highs, and if that should happen it's due more to luck than to skill. Also, it tends to result in frustrating whipsaw losses during periods of sideways non-trending markets. But, it should get you aboard near enough to the highs and lows, in trending periods. to score some meaningful and consistent profits on both sides of the market. 

Until someone discovers a better way for the non-professional speculator to trade, trend-following and betting on the favourite (a 'best bets‘ position) will probably continue to be the best approach to consistent and reasonable-risk trading. One other aspect to good bets‘ trading is utilizing a strategy for re-entering a trending market which you have exited prematurely.

Clearly, one of the imperatives in collecting big profits is the ability to sit on a with-the-trend position for the major part of a move, be it just a few months or even longer. This is easier said than done. There are many reasons why traders close out a position prematurely. These include getting stopped out on a too-close stop, or closing out due no

boredom, impatience or nervousness. Also. the general psychology of dynamic markets is that the prevailing opinion is generally most bearish just before an upwards tum, and most bullish just before n downwards tum. ‘N0 one ever goes broke taking a profit,‘ they say. My response is, ‘no one ever gets rich taking a small profit in a big trending market.‘

We have all experienced this. We grab a small or intermediate profit and then, shortly thereafter. the market commences a major move, while we witch from the sidelines, with no position.

Livermore said it succinctly:

‘Men who om both be right and sit tight are uncommon. l found it one of the hardest things to leam. But it is only after a market operator has firmly grasped this that he can make big money. lr is literally true that millions come easier to a trader after he learns how to trade, than hundreds did in the days of his ignorance.’

The bottom line is, if you exit a trending position, regardless of the reason, and on the close of the next two days the trend is still in the original direction, you should get back aboard. And it doesn't matter materially if the price is higher or lower than where you exited. There are difl'erent strategies for re-entering a market. You can place an order to re-enter the market US$200 on stop above the high of the day you exited  (for a long position) or US$200 on stop below the low of the day you exited (for a short position). Alternatively you can use a short-term entry strategy, such as close versus 4-day versus 9-day simple moviig averages, which can also be effective for getting you back aboard a good trending position. On getting back into the market, do not neglect to re-enter a protective stop,