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A Compounding Strategy from a Roulette System Gambler

Let's say your starting capital is one thousand dollars ($1,000).  If the daily compounding were one percent (1%), it would be about 30 months time to reach one million dollars ($1,000,000). Keep in mind though the market is not open every day. Not only is it difficult to achieve this kind of consistently, you also need to be aware of slippage fees and commission costs as well. As a futures trader and roulette system player, I know how important the principals of compounding and risk control are. Strategy from a roulette system gambler.At the same time, it demonstrates just how important it is to have a winning system or strategy. It's not all about hitting the one huge trade.

Win More Than You Lose

Having a rate of success of around 60 to 70 percent is considered an great way to begin building your account balance. It can be a little tricky at times to measure success because you need to measure both the average amount made on each trade as well as the percent of trade that were successful. The profit made is a matter of upmost importance, but your perforance can be skewed by just one huge win. Of course that's super for the particular time period, but if you just lost 90 percent of this week's trades and then just made an unusual ten thousand percent return of your last trade, then you can't count on that over time. At that rate, your losses would eventually eat up the account. 

In an ideal world, our goal is to have at least half of our trades show a profit. It sure would make things easier. That being said, it's entirely possible for a seasoned trader to only have a 30% win rate and still show a profit. Although calling the tops and the bottoms is not easy, an expert can hold on to a trade until the right moment, cutting a loss fast, or maximizing the potential profit.

I read a FOREX book I read once that demonstrated a winning system for trading breakouts. The perfect entry was important for this winning strategy to work. Getting the perfect entry gives you a position that goes into the green right away! Has that ever happened to you? You place your bet and the trade goes into profit without ever going into the red. Probably not very often, if ever.  It's really tough to time it perfectly. So my advice is to just aim to have a system that wins more often that it losses. Of course you'll need to incorporate proper money management rules so you can max out your gains as much as possible while controlling your risk. This is very important. Money management is where most traders end up blowing up their account. Control your greed and focus on consistent steady returns and you'll do fine.

Once money is being made on a consistent basis, you'll begin to see your trading account expand. The compounding effect of small wins will grow and grow over time.  Take your starting balance, at a compounding weekly rate of 10% would equal nearly 250 percent is less than three months time. Smaller accounts grow at the same rate as larger accounts with the exception of transaction costs slowing the growth rate of smaller accounts somewhat.

Avoid Gambling - Use Proper Money Management

Let's assume that you decide to risk your entire trading account on ever single trade. Well, it would only be a matter of time before you lost everything. Well, maybe not everything, like in gambling. Betting on a 5 cent stock that goes to 1 cent is an 80% loss. Using stops can help prevent a catastrophic loss, but there's no guarantee that you'll get filled at you stop price. Stop orders are filled immediately at the current market price, whatever it is.

Proper money management is much more than just reducing your loss. Always balance your risk to reward ratio to ensure that your losses don't outweigh your wins. If you are indeed winning the majority of the time, then it's just boils down to making sure that you are using the right position sizes in order to avoid any big losses.

It goes without saying that of you are getting a 10% return on your wins, but at the same time losing an average of 25% on your losses, it's a recipe for disaster. Keep your focus on the total amount. You see, the TOP level is where compounding really does it's work. Not on the individual trades themselves. So a winning trade of 15% can be 2 percent of your account. The following day you can either use more in your position or place another trade to make 15 on a bigger bet. There will always be setbacks. Two steps forward and one step back. Or three steps forward and two steps back. Having reasonable goals will keep you on track to slow and steady gains without catastrophic losses. You might have a bad week or even a bad month. However as your trading account grows, you'll begin to scale-up your bets to grow your account to amount you never imagined. It's the power of compounding your winning bets.

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Comment by Skot Kortje on August 7, 2016 at 11:03am

Thanks for the great post, Anderson. You present some sound trading principles. Certainly, your emphasis on disciplined trading systems and the parallel approaches that are used in gambling are important foundations for successful trading.

On the topic of trading in a roulette game framework you maybe interested in Brian Ault's article on Weeklys options setup: Trading Weeklys . He also recorded a video blog that elaborates further on the trading strategy: Video blog - Weeklys options strategies .

Comment by Anderson Colby on August 11, 2016 at 5:02pm

Thanks for letting me know about Mr. Ault's article and video.  I love Brian's systematic ideas on a roulette game framework for option strategies.


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