Investment Lessons from the Blackjack Table

Sometimes, I play blackjack. It's the only type of gambling that I've ever really been interested in, due to the surprisingly small house advantage - I don't have the skill to count cards, yet the odds are still not stacked too high against me. It occurs to me that there are a lot of similarities between blackjack and stock trading.

The main thing, I think, is that odds are in blackjack that at some point in the evening, you'll have more money than you started with. If you walk away from the table at that point, you've won - just not much. On the other hand, if you stick around waiting for the big payout, odds are good that you'll wind up behind, but there's that tantalizing chance that you'll walk away rich.

I sold my Timminco stock for a $400 profit, 9%. This is not the most I could have sold it for, and if TIM can deliver on their promise to make UMG-Si at $10-$15/kg, it could easily turn out that I missed out on $10 000. But, like blackjack, it's probably best with a wild swinging stock like this to walk away while I'm up. There's every possibility that they will be unable to deliver on their promises, in which case the company will only be worth a fraction of its current value.

I've found this to be true in my other speculative holdings. I have a great deal more confidence in the ability of FR and WEE to deliver on their promises...yet in both cases I've let slip chances to make a 10% profit and walk away, and in return, I'm currently sitting down 22% on the two.

So, maybe I'm a wimp...maybe I really don't have the balls of steel that it takes to make the big returns. On the other hand, maybe I'm that smart player who can consistently take small profits and run with them. After all, if I could consistently turn 10% on a trade in about a week, I could generate massive annual gains.

Anyway, for better or worse, TIM is closed, and I'm looking for the next one.

Update:
In the time it took me to write this post, TIM dropped from $16.30, where I sold it, to $15.00...within pennies of my buy point. Am I feeling happy right now? I think so.

Ooops. Read the Manual.

Interesting. I made a mistake when I was picking stocks to watch with regards to deciding whether swing trading was right for me. My mistake was that while I found to stocks (TSX:DWI and TSX:IGM) that were showing trends, neither was in the buy (or short) zone in between the 10 and 30 day moving averages. Good thing I'm just watching and not buying.

Now, both of them are in the process of pullbacks, moving in the opposite direction of the trends I identified in my last post. Which is good, actually kind of confirms the system. Now what I have to look for is for the pullback to bottom, and hopefully reverse within trading zone. I think I may need to come to a better understanding of ADX before looking to actually trade using the swing trading system, as I am at a loss for why the ADX is going up for DWI and down for IGM. According to swing-trade-stocks.com this would mean that the uptrend for DWI is strengthening and the downtrend for IGM weakening, but I'm just not clear on why.

Lots of factors to figure out.

A Decision

Dull as it is, I've decided to stick with my current holdings. I think once I do decide to sell, I might try out the swing trading stategy I discussed on Friday, but before I jump in with both feet, I'll keep a watch on a few stocks that I would consider based on that strategy.

The two that I'm watching are Dragonwave (TSX:DWI), and IGM Financial (TSX:IGM). I guess it's clear by now that I'm very focused on the Canadian market. I've concluded that I don't really want to be taking any currency risk at this point in time.

I picked those two from a few that came up use stockchart's stock scanner. DWI showed up as an uptrend, while IGM was showing as a down trend. Of the options, they were the two that seemed to exhibit the patterns that I would be looking for in a swing strategy.

The difficulty I have with technical strategies is that technical patterns are easy to see in hindsight, but are, at best a guessing game while they develop. Patterns with opposing meaning can appear very similar before they complete.

So, I'm not risking any money on it, but if the stocks perform as I'd expect them to, I'll definitely try swing trading on live trades next.

Finding a Strategy

When I started on stocks, I had intended to trade them regularly in order to lock in profits and move on to the next opportunity. It hasn't really worked out that way. Currently, I'm hovering around the point where I break even since I started this blog. I believe I'm up slightly due to the BMO dividend, but I haven't recieved it yet.

So today, I started reading a bit. At first, I was mainly interested in how to read candle charts, as that had not been well explained in my class. But the website that I linked also discussed one type of trading strategy - swing trading - which makes a lot of sense to me.

Essentially the strategy revolves around identifying stocks that are in an uptrend (or downtrend for shorting purposes), and buying during "swings" in the trend...slight corrections in the middle of a larger trend.

So, I took at look at the technical strategy outlined there, and compared it to my own current holdings. While the news is optimistic on two TSX:BMO and, I think, TSX-V:WEE, it's a little less so on TSX:FR. Indeed, the chart seems to show that its recent recovery could just be the first swing in a downtrend.



So I'm left with a dilemma. I still think that FR is a solid company, and will come back, but I might potentially make more money if I were to cut my losses and try to catch a stock that is actually moving up right now.

There's conflicting emotions, too. (Anyone who can trade stocks completely on technical aspects must have balls of steel.) On the one hand, I am tired of holding on to the same three stocks hoping for good things to happen. But on the other, I am hesitant to sell stocks that I am optimistic about just because they've hit a rough patch.

Markets are closed for the weekend now, so I've got a few days to mull those thoughts over. It's really a decision between finding and sticking to a strategy, whether that be the buy and hold stocks with good fundamentals, or frequent technical trading. We'll see how I feel about it on Monday.