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Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House
By Richard L. Weissman
Copyright © 2011 by Richard L. Weissman.

Notes

PREFACE

1. Although numerous authors have addressed the concepts collectively known

throughout this book as the casino paradigm, one of the most comprehen-
sive and lucid expositions of this paradigm is Trading in the Zone, by Mark
Douglas (Prentice Hall, 2001), pages 101–106.

CHAPTER 1 DEVELOPING POSITIVE

EXPECTANCY MODELS

1. See Devil Take the Hindmost by Edward Chancellor (Plume, 2000) pages
14–20.
2. See the Forbes.com article “Inside the Semgroup Bust” by Christopher Helman
(July 28, 2008).
3. See “Prospect Theory: An Analysis of Decision under Risk” by Daniel Kahne-
man and Amos Tversky, in Econometrica 47(2) (March 1979): pages 263–291.
4. See the Oil Marketer article “Crude Prices Rise Despite Oil Inventory Gains in
US,” by Elaine Frei (April 29, 2009).

CHAPTER 2 PRICE RISK

MANAGEMENT METHODOLOGIES

1. See A Tract on Monetary Reform, by John Maynard Keynes (Prometheus

Books, 2000).
2. Slippage, or liquidity risk, is the difference between assumed and actual entry
or exit prices.
3. Parameters and programming code for all mechanical trading systems pre-
sented throughout the book are detailed in Chapter 6.
4. Worst peak-to-valley drawdowns in equity are the most robust risk metric
since they measure a portfolio’s mark-to-market from its ultimate high wa-
ter mark to its most severe nadir in assets under management (as opposed to
merely calculating closed-out losses).

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5. See page 181 of Market Wizards by Jack Schwager (Marketplace Books, 2006).
6. On page 260 of Trading for a Living (John Wiley & Sons, 1993), Dr. Alexander
Elder offers risking 2 percent of assets under management on a single trade as
a valid alternative position-sizing ceiling for those with a greater risk appetite.
7. See Ralph Vince’s Portfolio Management Formulas (John Wiley & Sons, 1990).
8. See page 170 of my first book, Mechanical Trading Systems (John Wiley &
Sons, 2004).
9. See page 189 of Market Wizards by Jack Schwager (Marketplace Books, 2006).

CHAPTER 3 MAINTAINING
UNWAVERING DISCIPLINE

1. See pages 153–154 of Nassim Taleb’s Fooled by Randomness (W.W. Norton,

2001). Although Taleb uses the urn analogy to illustrate success despite nega-
tive expectancy, it is (obviously) equally adaptable to problems of failure de-
spite positive expectancy.
2. Fading occurs when speculators do the exact opposite of a particular trading
strategy.

CHAPTER 4 CAPITALIZING ON THE

CYCLICAL NATURE OF VOLATILITY

1. The only exception to this rule of volatility’s cyclical nature is a paradigm shift,
which results in an asset no longer being traded, such as bankruptcy of a com-
pany, delisting of formerly publicly traded companies, and so on.
2. The Chicago Board Options Exchange Market Volatility Index, or VIX, is a
popular measure of implied volatility of S&P 500 Index options. It conse-
quently has an inverse relationship to stock market prices and is often re-
ferred to as a fear index. Because the VIX is a directional indicator, traders
sometimes mistakenly think that volatility indicators can be used to determine
market direction.
3. See J. Welles Wilder Jr.’s New Concepts in Technical Trading Systems (Trend
Research, 1978).
4. The three series of months closest to expiration are used to dampen the effects
of volatility backwardation as expiration approaches.

CHAPTER 6 MINIMIZING
TRADER REGRET

1. An interesting aside: Although all experts agree that undercapitalized traders

are at a disadvantage (as discussed in detail throughout Chapter 2), there
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is some debate regarding the relative advantage of large (more than

$10 million in assets under management) versus intermediate-sized (between
$200,000 and $10 million in assets under management) traders. Admittedly,
many of the sources citing the advantage of large traders were written during
the era preceding the information revolution of instantaneous dissemination
of news, electronic trading, and deep discount brokerages. Before such inno-
vations, perhaps large traders did have an advantage; nevertheless, I would
argue that this is no longer the case. Nowadays, the advantage is clearly with
intermediate-sized accounts. Larger accounts are subject to levels of liquidity
risk that do not affect intermediate-sized players. Such risks manifest in a va-
riety of ways, including partial fills or unfilled profitable limit orders as well as
severe slippage on stop loss orders.
2. Interest rate futures contracts are priced in 32nds and notated as 126’02.5 (for
example), meaning the asset is priced at 126 and 2.5 thirty-seconds. In this
example, the U.S. 10-year Treasury note futures are valued at $126,078.125.

CHAPTER 7 TIMEFRAME ANALYSIS

1. Wilder’s Relative Strength Index is calculated as follows:

RSI 100 100 (1 RS)

where RSI Average number of x days up closes/average number of x days

down closes. RSI is consequently a percentage oscillator and is bounded,
meaning its readings cannot go above 100 or below zero. It therefore offers
technicians a mathematically objective answer to the question “What is the
trend?” since readings above 50 suggest bullishness, and readings below 50
are bearish.

CHAPTER 8 HOW TO USE

TRADING MODELS

1. Since my first book, Mechanical Trading Systems (John Wiley & Sons, 2004),
discussed issues like portfolio composition, equalized active continuation
charts, optimization, curve-fitting, and so on, instead of rehashing those con-
siderations here, I will assume familiarity with these issues and refer inter-
ested readers to that text.
2. In 2003, when I wrote Mechanical Trading Systems (John Wiley & Sons,
2004), although some futures markets were electronically traded, most were
still dominated by open outcry. Consequently, final reported volumes of
exchange-traded futures contracts always lagged by one trading day. As
a result, the book did not include volume indicators in its mechanical
trading systems.
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3. Although it is beyond the scope of this book, Tom DeMark has been a trail-
blazer in mechanizing many traditionally subjective technical tools such as
trendlines, retracements, and so on. For readers interested in DeMark’s work,
I refer you to the Bibliography.
4. See John Murphy’s Technical Analysis of the Financial Markets (New York
Institute of Finance, 1999).
5. Compare this chart to the Home Depot trade in which we did not wait for RSI
to drop because of the stock’s weak close its day of divergence.
6. Although electronic trading ended the viability of these day trading models,
I refer readers interested in day trading models applicable to any or all as-
set classes to the timeframe confirmation and timeframe divergence methods
outlined in Chapter 7.
7. See Mark B. Fisher’s The Logical Trader (John Wiley & Sons, 2002).

CHAPTER 10 TRANSCENDING COMMON

TRADING PITFALLS

1. Prayer can prove beneficial in trader psychology if our focal point is even-
mindedness or unemotionally charged prayers for clarity.
2. See pages 151–152 of Brett Steenbarger’s The Psychology of Trading (John
Wiley & Sons, 2003).

CHAPTER 11 ANALYZING
PERFORMANCE

1. See pages 28–38 of Dr. Alexander Elder’s Trading for a Living (John Wiley &
Sons, 1993).
2. The exception to these percentages occurs when actively traded front-month
futures roll forward to what will be their new front month.
3. An example of a double fill is when stop orders result in our exiting of a posi-
tion, and then limit orders are executed, resulting in unintended open market
positions. Orders like “one cancels other” prevent double fills by canceling the
limit after the stop is executed (or vice versa).
4. Underleveraged trading is the testing of research ideas in real market condi-
tions without putting significant capital at risk. If a typical trade risked 1 per-
cent of assets under management, an underleveraged trade might risk one-
tenth of 1 percent.
5. These biases are offered for illustrative purposes only and should not be
thought of as hard-and-fast delineators of intermediate as opposed to ad-
vanced trading skill levels.
6. See page 110 of Sun Tzu’s The Art of War (Oxford University Press, 1963).
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CHAPTER 12 BECOMING AN
EVEN-TEMPERED TRADER

1. See pages 37–39 of Chetsang Rinpoche’s The Practice of Mahamudra (Snow

Lion, 1999).
2. See page 78 of Sogyal Rinpoche’s The Tibetan Book of Living and Dying
(HarperOne, 2002).