Stock Market Timing

Investing Lessons from the Gaming Table

Wouldn't it be great if you knew exactly when the stock market was going up, and when it was going down? If you had this knowledge, you could move your money into and out of your investments at exactly the right times, experiencing all of the gains and none of the losses associated with investing.

Of course, many people share this dream, and many approaches to predicting market movements have been tried over the years. Can it be done? The answer is yes - and no. Not a very good answer - but there are random elements to the market that can never be eliminated.

It turns out that investing in the stock market has a lot in common with gambling. This is not to say that the level of risk, or the odds of winning are the same - of course they're not. But embedded in stock prices are both predictable trends, and unpredictable ones. Of course, we are at the mercy of the truly unpredictable price movements. So we have to make the most of the predictable ones.

This is the same dilemma a professional poker player faces. Using his or her skill, the professional poker player has a lot of control over the outcome of the game. But the distribution of the cards is still random, and the game can go against any poker player at any time. Our professional will undoubtedly win more than he loses, over time, but losses will still happen - they are inevitable - and no amount of skill can control the truly random elements of the game.

If you haven't seen the movie "21", or read the book it's based on, "Bringing Down the House", consider this to be a recommendation. It's the true story of a group of kids from MIT who formulated and executed a team-based mathematical system for winning at blackjack. The movie makes it seem almost as though using the blackjack system produced immediate and consistent wins at the blackjack tables. In reality, of course, a blackjack system such as this will produce an edge over the house of just a couple of percentage points. So the players would have to sit through many, many losses as well as wins. Over time, thanks to the system, the winnings will surpass the losses. To compensate for the fact that profits might take many days to appear, the MIT blackjack team would employ many players working the tables simultaneously. In this way, the wins and losses from all of the players average together, and a smoother, more consistent trickle of profits emerges.

The TradeWHEN system shares similar features with this idea. By employing multiple trading systems combined with multiple investments, we get an average return which is much smoother and more consistent than what we would get using just one set of stock market timing signals. See the charts page, where this concept is further explained.