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P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford i P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford Trade Like a Casino i P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford Founded in 1807, John Wiley & Sons is the oldest independent publish- ingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe, Australia,andAsia,Wileyisgloballycommittedtodevelopingandmarket- ing print and electronic products and services for our customers’ profes- sionalandpersonalknowledgeandunderstanding. TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in between, these books will provide theadviceandstrategiesneededtoprospertodayandwellintothefuture. Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com. ii P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford Trade Like a Casino Find Your Edge, Manage Risk, and Win Like the House RICHARD L. WEISSMAN JohnWiley&Sons,Inc. iii P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford Copyright(cid:2)C 2011byRichardL.Weissman.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,orontheWebat www.copyright.com. Requests to the Publisher for permission should be addressed to the PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheir besteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespect totheaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimany impliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymay becreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceand strategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanyloss ofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. ChartsinthebookareusedcourtesyofCQG,Inc.(cid:2)C 2010.Allrightsreservedworldwide. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outside theUnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappears inprintmaynotbeavailableinelectronicbooks.FormoreinformationaboutWiley products, visit our web site at www.wiley.com. LibraryofCongressCataloging-in-PublicationData: Weissman,RichardL. Tradelikeacasino:findyouredge,managerisk,andwinlikethehouse/ RichardL.Weissman. p.cm.—(Wileytradingseries) Includesbibliographicalreferencesandindex. ISBN978-0-470-93309-1(cloth);ISBN9781118137949(ebk); ISBN9781118137956(ebk);ISBN9781118137963(ebk) 1.Speculation. 2.Investmentanalysis. 3.Riskmanagement. 4.Portfolio management. I.Title. HG6015.W3462011 332.64(cid:3)5—dc22 2011016573 PrintedintheUnitedStatesofAmerica. 10 9 8 7 6 5 4 3 2 1 iv P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford For my wife, Pamela Nations-Weissman, who laughed when I swore I would never write another book. v P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford vi P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford Contents Preface xi Acknowledgments xvii PART I The Casino Paradigm 1 CHAPTER 1 Developing Positive Expectancy Models 3 WhyTechnicalAnalysisHelps 3 TheInefficientMarket 6 IfItFeelsGood,Don’tDoIt 10 “JustMaketheMoney” 15 FinalThoughts 21 CHAPTER 2 Price Risk Management Methodologies 23 OneSureThing 23 BaseofPyramid 26 MiddleofPyramid 37 ApexofPyramid 47 ProsandConsoftheRiskManagementPyramid 49 PuttingItAllTogether:ACaseStudy 49 FinalThoughts 51 CHAPTER 3 Maintaining Unwavering Discipline 53 DefiningDiscipline 53 DisciplineandthePositiveExpectancyModel 55 TypesofTraders 61 DisciplineandPriceRiskManagement 64 vii P1:OTA/XYZ P2:ABC JWBT548-fm JWBT548-Weissman July28,2011 4:1 Printer:CourierWestford viii CONTENTS PatienceandDiscipline 67 FinalThoughts 70 PART II Trading Tools and Techniques 71 CHAPTER 4 Capitalizing on the Cyclical Nature of Volatility 73 TheOnlyConstant 73 DefiningVolatilitywithTechnicalIndicators 76 BuildingPositiveExpectancyModelswith VolatilityIndicators 89 FinalThoughts 94 CHAPTER 5 Trading the Markets and Not the Money 95 TenThousandDollarsIsaLotofMoney! 95 BabyNeedsaNewPairofShoes 99 TradingwithScaredMoney 100 TimeIsMoney 101 FinalThoughts 104 CHAPTER 6 Minimizing Trader Regret 105 TheSofterSideofDiscipline 105 IssuesforTrendFollowers 106 IssuesforMeanReversionTraders 113 FinalThoughts 123 CHAPTER 7 Timeframe Analysis 125 TraditionalTimeframeAnalysis 125 TimeframeConfirmationTrading 131 TimeframeDivergenceTrading 131 FinalThoughts 142 CHAPTER 8 How to Use Trading Models 143 MechanicalTradingSystems 143 NonmechanicalModels 162 EquityTradingModels 170 FinalThoughts 175

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A detailed look at the common characteristics found in most successful tradersWhile there are a variety of approaches to trading in the financial markets, profitable traders tend to share similar underlying characteristics. Most have a methodology that they believe will prove profitable over the lon