Isolate your edge; don't just gamble, trade

The other night I was hanging out with some guy from the Gambia, talking about Reggae and dark-haired Danish girls, that kind of thing. His friend (probably Sengalese) was playing the slots. Hitting the button over and over again. He poured €170 into it, all gone. Sometimes he wins €200 so he wants that back. He even borrowed another €30 from the döner shop and poured that in. He was philosophical about it, but he just can't stop. The Turkish kids all gamble too, but he pointed out that they steal. At least he was honest and sold weed.

Some study [citation needed] showed that both humans and monkeys will find a game addictive when the result is erratic. If its predictable, then the game becomes boring. Even if the terms of the game are against you (its a slot machine, do the math) you will still play it because your brain rewards those sensations.

That reminds me of scalping, which I've told myself to stop doing, and yet sometimes I think I see an opportunity and pop a trade in there. More often I feel the DESIRE to make a trade (missed out on a rally) and then convince myself I see a move and then I'm in. Classic over-trading.

I do know what pieces of knowledge I need to become successful at it. I have in periods been focused and operated correctly and profited. I need market delta, to learn the corporate-bond/treasuries market (as a tell), to watch advancers/decliners and to watch the sectors more carefully. Mostly I just watch TICK and TRIN, and that's not enough.

As I've posted in this blog, I don't see any purpose in scalping other than to learn how to deal with the traders world of :

1. randomness (reacting correctly to unexpected events)

2. market tells (reading the market correctly, not just through price action)

3. focus amidst overwhelming amounts of information (isolating what I do know)

4. the most basic lesson : cut your losers fast, let your winners run

Learning this at a micro, real-time level prepares me for intelligently doing REAL trading which is actually investing.

I don't see any just or moral purpose to scalping, but investing allows an effect on the world.

Not all trading/investing requires having massive analytic and fast execution trading desks. But you have to understand what the little guy can do well and focus on that.

Lately I've been burying my head in fundamental analysis. I'm becoming a fundy. Its amazing : shitty books go down and good books go up. Its fucking magic.

why are we in the lemonade business ?

Calvin (to Susie): Look at this glass of lemonade. You'll be able to sell it for 50 cents tomorrow, but I'll sell it to you for 25 cents today.

Susie: But I don't have the money.

Calvin: That's okay, I'll loan you the money. You can pay me back with interest... say... 35 cents. The lemonade will surely be worth 50 cents tomorrow... You can even drink part of it, sell the rest, and still be able to pay me back.

Susie: Well, I guess... you've been selling lemonade for so long, you should know.

Calvin: Here ya go.

Random kids: Wow, what an easy way to make dough! We'll take some of your lemonade too on exactly those terms.

Random kid: Hey, if I can get another kid to loan me money against the future value of this lemonade, I can invest it in lemons now and be a millionaire by the end of the day. Who knew getting rich is so easy?

(meanwhile just in eyeshot)

Moe 1 to Moe 2 (Rosalyn?, random kid?): I bet Susie won't be able to sell that lemonade tomorrow.

Moe 2: You're on.

Calvin to Moe 2: Say Moe 2, I just sold a bunch of lemonade and will get paid big time when they pay me for it, can I borrow some money to buy more lemons. I sure am glad lemonade's a fungible commodity.

Moe 2: Sure, I'll be making some dough when Susie won't be able to pay you back, so I feel comfortable loaning you more money now.

Mom: Geez, look at all that lemonade Calvin is selling... and if the Moe 2 is still lending him money, he must be doing something right. If I want to sell any lemonade I better do like he does so I don't lose any market share.

(next day)

Susie: Gee, I drank only a sip of that lemonade, and now no one wants to buy it. I won't be able to pay Calvin back completely. At least I got a sip... I'll pay him for that.

Calvin: Where's my money?

Susie: I couldn't sell your lemonade. But here's 15 cents... it's all I can pay.

Calvin: WHAT!?! But that beverage is so valuable... it's worth at least 50 cents.

Susie: Sorry, I know... I thought I would be able to make a fortune.

Calvin: Crap, me too. Well I'll have to take back what's left.

Susie: I don't think anyone else will want it.

Moe 2 (to Calvin): Where's my money?

Calvin: I don't have it. Here's some lemonade.

Moe 2: Don't have it? day-old lemonade? yuck.

Moe 2 (to Moe 1): see he doesn't have it, pay up.

Moe 1: I don't have any money, I was betting with those other kids that they'd be able to sell their lemonade, that was the only way I'd be able to pay you.

Moe 2: no money?

Moe 1: no money.

Calvin: Well I'd have some if you let me borrow some more.

Moe 2, Moe 1 and Calvin fall into a dust storm of fighting... Calvin narrowly escapes the fray

Mom: Geez things are hairy out there. I sure loaned out a lot of lemonade. I don't think I'm ever getting paid back. Now they'll all come whining to me about how they lost all their money and their lemonade.

Maybe Calvin's system isn't working out so hot, but If he has to shut down his lemonade stand, nobody will have lemonade ever.

Mom (to Calvin): Here, Calvin. This is 2 dollars. Buy some lemons and sugar.

Susie: I lost all my lemonade too, and my quarter, now I can't buy anything.

Mom (to Susie): Here Susie, this is 2 dollars, you should be able to plant a lemon tree with this, and you'll have all the lemonade you want. You can help me with chores if you want more.

(Mom continues paying out to all the neighborhood kids and the bullies for the blunder she and Calvin made.)

Mom: What the hell am I gonna do with all this day-old lemonade?

(later)

Dad: Where'd all our friggin money go? and What's with all this day-old lemonade. And why are you in the lemonade business to begin with?

Mom: What matters is that all the neighborhood kids have been made whole.

Dad: What do you mean... made whole‽ They took lemonade for free and then treated it as if it was worth a fortune to create an intricate web of bets and loans that ran the neighborhood economy into the ground.. and your answer is to dole out cash?

Mom: Well, we have to keep them occupied somehow or else they'll be in their houses bugging their parents and breaking things.

Dad: Well I guess you're right. We can't just do nothing

(elsewhere)

Calvin: MONEY MONEY MONEY MONEY!

Hobbes: Maybe you should try to just.. you know.. sell lemonade.

Calvin: But how am I supposed to make money doing that? I'm gonna sit on this wad of cash until Mom gets out of my hair, and then take Susie for all she has.

original posted on reddit