Double or Nothing by Tom Breitling with Cal Fussman is a fascinating book about two best friends who parlayed their $105 million sale of Travelscape into a shot at their dreams — owning a Las Vegas casino and restoring the Golden Nugget to its prior glory. For entertainment value alone, its a great read, and its free at the above link. I started this on the train ride home the other night, and didn’t stop until I was done.

I am quite sure the authors never intended the book to have anything to do with trading. However, like most books touching on gambling, and in particular the mathematics behind gambling, there are important lessons for traders.

My favorite lesson involved a craps player nicknamed Mr. Royalty who took the Golden Nugget for over $8 million. The odds in craps are better than most games, and far better than some like keno, but the house still has an edge. For traders, think of this as a negative expectancy. Yet, despite the house’s edge, Mr. Royalty won an amazing twenty-two times in a row. The odds against that kind of streak, according to the authors, are a whopping 7,869,881 to 1!

As Mr. Royalty proves, streaks happen, even wildly improbable ones. The casino’s edge, or the trader’s setup, can only define probability. Edge does not and cannot define outcome over one or even a small number of trades. Edge only imposes its will over a large sample. The only way to stay alive long enough to let your edge prevail is to keep your risk per trade low.

Related posts:

1. TradeChartPatterns.com is a must-read blog
2. Google Chrome for traders