Table of Contents
In this insightful interview, Richard Weissman, the author of Trade Like a Casino, shares his unique perspective on speculative trading. Weissman has a wealth of experience, having started his career in 1987 on the floor of the New York Futures Exchange. Over the years, he’s developed a trading philosophy that combines the discipline of a casino with the precision of a positive expectancy model. Today, he is the founder of CNV Capital Management, where he trades based on the cyclical nature of volatility.
In this blog post, you’ll learn how Weissman’s strategy emphasizes risk management, the importance of backtesting, and the mindset needed to succeed as a trader. He explains why treating trading like a casino—understanding probability and managing risk—can give you the edge. Whether you’re a beginner or experienced trader, his approach to discipline, model testing, and strategic betting is a game-changer in achieving long-term profitability.
Richard Weissman Playbook & Strategy: How He Actually Trades
Understanding the Casino Paradigm
Weissman’s strategy is built around the concept of “trading like a casino.” This isn’t about luck; it’s about applying structured risk management and accepting that outcomes are uncertain, just like the odds in a casino game.
Key Points:
- Probability Skew: Just like casinos, successful traders work with a built-in advantage known as probability skew. The market doesn’t always know what will happen next, but with the right strategy, the odds are in your favor over time.
- Risk Management: Casinos have table limits to control risk, and so should you. You need to control how much you’re willing to risk per trade to avoid a disastrous loss.
- Avoiding Emotional Decisions: Successful casinos don’t worry about a string of losses; they know the probabilities will balance out over time. In trading, this means sticking to your strategy and managing your risk, regardless of short-term losses.
Rules to Apply:
- Stick to a Positive Expectancy Model: Build a strategy that has a proven edge, like casinos rely on their probability skew. Don’t gamble with unpredictable methods.
- Set Risk Limits: Just like casinos have table limits, set strict maximum loss limits for each trade. Never risk more than 1% of your trading capital on a single position.
- Trust the Process, Not the Short-Term Outcome: Like a casino, understand that losing streaks are inevitable, but don’t let them affect your discipline. Stick to your system, and don’t chase losses.
The Importance of Backtesting
Before you commit to any trading strategy, Weissman stresses the importance of backtesting. This is essential to develop the confidence needed to stick with your system, especially when faced with a string of losses.
Key Points:
- Test Your Models: Backtesting allows you to see how your system would have performed historically. It’s essential for developing confidence and avoiding emotional decision-making.
- Understand Risk vs. Reward: Through backtesting, you can identify how much risk you’re taking on in relation to potential rewards, helping you adjust your strategy accordingly.
- Confidence in Your Edge: Knowing your system has been tested over thousands of trades gives you the confidence to endure the inevitable losing streaks.
Rules to Apply:
- Backtest Over 2000 Data Points: Make sure you have at least 2000 data points before trusting a strategy. This gives you enough data to understand how the system behaves in different market conditions.
- Look for Positive Expectancy: A system with positive expectancy means it will make money over time, even if some trades are losses. Ensure your system has this built-in edge.
- Test for Different Market Conditions: Your strategy should work in various market conditions, not just one. Test it across low volatility and high volatility periods to understand how it behaves.
Volatility and Position Sizing
Weissman’s strategy places a strong emphasis on understanding volatility cycles—transitions between high and low volatility. This knowledge allows him to anticipate where the market is likely to go and adjust his positions accordingly.
Key Points:
- Low Volatility Breakouts: When volatility is low, Weissman looks for breakout opportunities. These offer high potential reward with low initial risk.
- High Volatility Reversions: In periods of high volatility, Weissman looks for reversion-to-mean opportunities. These trades can be riskier but offer substantial rewards if timed correctly.
- Position Sizing Based on Volatility: The amount you risk on a trade should depend on the volatility of the market. During high volatility, reduce position sizes to protect against larger-than-expected moves.
Rules to Apply:
- Adjust Position Size According to Volatility: Use smaller position sizes in high volatility environments to manage risk. In low volatility, you can increase your position size.
- Identify Breakouts in Low Volatility: Look for breakouts after prolonged periods of low volatility. These tend to yield strong trends.
- Use Tight Stops in High Volatility: When trading in volatile conditions, place tighter stop losses to protect yourself from unpredictable moves.
Risk Management: Protect Your Capital
Risk management is the foundation of Weissman’s trading approach. Without it, even a positive expectancy model can fail if the trader doesn’t properly manage the risks associated with each trade.
Key Points:
- Control the Drawdown: Protect your capital during drawdowns. The goal is to avoid large losses that could wipe out your gains.
- Don’t Bet Too Big: Weissman warns against over-leveraging. Betting too big can lead to catastrophic losses, no matter how confident you feel.
- Know When to Exit: Always have an exit plan in place, not just for when the trade is going well but also for when it’s not working out.
Rules to Apply:
- Never Risk More Than 1% Per Trade: Always limit your exposure to no more than 1% of your trading account on a single trade.
- Exit Strategy Before Entry: Know where you will exit before you enter a trade. This means having a stop loss in place and knowing when you’ll take profits.
- Prepare for Event Risk: During major news events or high-impact times (like central bank announcements), reduce your risk exposure. These moments can lead to unpredictable price moves.
The Importance of Discipline
Discipline is one of the most critical factors for Weissman’s success. Without it, even the best strategies will fail. Discipline helps you stick to your strategy, trust the backtested results, and avoid emotional trading.
Key Points:
- Avoid Emotional Decisions: Stick to your system, even when the market seems to be moving against you. Emotional trading often leads to poor decisions.
- Consistency Over Time: Trading is a marathon, not a sprint. The key to success is consistently applying your strategy, not trying to make big gains quickly.
- Stay Calm During Losses: Losses are part of trading. It’s crucial to stay calm and not let them lead you to abandon your strategy or overtrade.
Rules to Apply:
- Follow Your Strategy, No Exceptions: Discipline is key. Stick to your system, and don’t deviate, even when the market looks tempting.
- Cut Losses Quickly: If a trade is going against you, cut it quickly and move on. Don’t let losses linger and erode your confidence.
- Be Patient: Trust the process. It’s not about making money on every trade but about making money over time by sticking to your plan.
Trading Style: Trend Following and Counter-Trend
Weissman combines two main strategies in his trading style: trend-following and counter-trend trading. These strategies allow him to capitalize on both market directions, depending on the prevailing volatility and market conditions.
Key Points:
- Trend Following: In periods of low volatility, he uses trend-following strategies, where he trades in the direction of the market’s movement.
- Counter-Trend: When volatility is high, he switches to counter-trend strategies, betting on the market reverting to the mean after excessive price movement.
- Adapt to Market Conditions: Understanding the market environment allows Weissman to adjust his strategies accordingly. This flexibility is key to his success.
Rules to Apply:
- Use Trend Following in Low Volatility: Look for trends to develop in quiet, low-volatility markets. These trends tend to last longer and offer better reward-to-risk ratios.
- Counter-Trend in High Volatility: When the market is extremely volatile, switch to counter-trend strategies. Look for moments when price extremes revert toward the mean.
- Adapt to Market Conditions: Always assess the current market volatility before selecting a strategy. Don’t try to force a trend-following strategy during high volatility or vice versa.
Trading Like a Casino: Mastering the Probability Skew for Consistent Profits
Richard Weissman’s approach to trading draws a unique parallel to the world of casinos. In his view, successful traders, like casinos, don’t need to predict every single outcome, but instead, they need to understand and work with the odds. The key to making consistent profits is the “probability skew”—the built-in advantage that comes with following a proven system. Casinos thrive because they understand that over time, their probabilities are in their favor, even though individual outcomes may vary. For Weissman, applying this same mindset to trading is the key to long-term success.
Traders who adopt the casino model understand that risk management and patience are crucial. Instead of focusing on making money on every single trade, Weissman emphasizes that it’s about the long haul and having the discipline to keep following your strategy, no matter the short-term losses. Just like a casino, you need to manage your risk and avoid placing large bets on any single trade. By focusing on positive expectancy and managing the probability skew in your favor, you can create a system that allows for steady, reliable gains over time.
Risk Management Rules: Protecting Capital with Smart Position Sizing
For Richard Weissman, effective risk management is the cornerstone of any successful trading strategy. He stresses that it’s not about hitting home runs with every trade, but about managing risk in a way that protects your capital over the long term. By applying a strict position sizing rule, traders can mitigate the impact of inevitable losses and ensure that no single trade has the power to derail their entire portfolio. This philosophy ensures that traders can survive the ups and downs of the market, and more importantly, thrive in the long run.
Weissman’s approach involves limiting the amount of risk on each trade to a fixed percentage of your capital, typically no more than 1%. This strategy forces traders to remain disciplined, even when they feel tempted to bet bigger during moments of high conviction. By consistently managing risk, traders can stay in the game through losing streaks, ultimately allowing their strategies with positive expectancy to work. It’s about controlling the downside while allowing for the upside to unfold, a critical lesson that all traders can implement for more sustainable success.
The Power of Backtesting: How Confidence in Your Model Drives Discipline
Richard Weissman places immense value on backtesting as a tool for building confidence and discipline in trading. According to Weissman, a trader’s strategy must be supported by solid backtesting data to withstand the psychological pressures of the market. Backtesting is not just about checking if a strategy works in theory; it’s about knowing that, over thousands of trades, your system has a proven edge. This gives traders the confidence to follow their strategy, even when faced with a series of losses, because they know their edge will pay off over time.
Weissman emphasizes that without backtesting, it’s nearly impossible to have true confidence in your system. When you backtest a strategy, you see its potential risks and rewards firsthand, helping you manage expectations. This preparation ensures you won’t abandon a strategy at the first sign of trouble, which is a common mistake among traders who lack backtested data. With thorough backtesting, Weissman says, you can make informed decisions and stick to your plan with the discipline needed to achieve long-term success.
Navigating Volatility Cycles: How to Spot Low-Risk Breakouts and Reversions
Richard Weissman’s strategy revolves heavily around understanding and navigating volatility cycles, which play a crucial role in his approach to identifying high-probability trades. By focusing on transitions between high and low volatility, Weissman can spot breakout opportunities with minimal risk. During periods of low volatility, the market tends to “build up” before making significant moves, and Weissman looks for those moments to enter trades with favorable risk-reward ratios. This insight allows him to capture profits without being exposed to the unpredictable swings of high volatility environments.
In high volatility markets, Weissman switches to a counter-trend approach, looking for reversals once the market has overextended itself. While these trades can carry higher risks, they offer significant potential rewards if managed properly. By understanding where the market is in its volatility cycle, Weissman can adapt his strategies accordingly. This adaptability is what allows him to profit from both trending and ranging markets, providing a flexible yet reliable trading framework that works across different market conditions.
Discipline Over Emotion: Sticking to Your Strategy Even After Multiple Losses
Richard Weissman emphasizes that discipline is the key to trading success, far outweighing the importance of any strategy or technical indicator. Even with the best systems in place, it’s easy for traders to fall prey to emotional decisions, especially after a string of losses. Weissman’s approach involves building a system that can endure the inevitable losses, allowing traders to follow through with their strategy even when the market is against them. The real challenge is not the market itself but the trader’s ability to maintain discipline and adhere to the plan.
Traders who lack discipline often find themselves deviating from their strategy at the first sign of trouble, chasing trades, or increasing position sizes out of frustration. Weissman teaches that trading is about the long game and that sticking to a tested system, no matter the short-term setbacks, is what ultimately leads to consistent success. By focusing on process over profits, he argues, traders can better manage their risk and keep their emotions in check, leading to more rational decisions and better long-term outcomes.
Richard Weissman’s approach to trading is rooted in a disciplined, risk-managed strategy that focuses on understanding market probabilities rather than trying to predict every market movement. Throughout his career, Weissman has honed his playbook around the concept of trading like a casino, where success comes not from gambling on every single outcome, but from managing risk and maintaining a long-term edge. Key to his strategy is mastering the “probability skew” that favors traders with systems built on positive expectancy, just as casinos thrive on their built-in advantages.
One of the biggest lessons from Weissman is the critical importance of risk management. He consistently emphasizes that no single trade should jeopardize your capital, and the key to survival in trading is controlling risk through position sizing and disciplined execution. Backtesting also plays a crucial role in Weissman’s strategy, helping traders develop confidence in their models and the discipline needed to stick with them, even in the face of losses. Moreover, understanding volatility cycles allows Weissman to adjust his trading approach, whether he’s capitalizing on low-volatility breakouts or countering high-volatility reversals. Ultimately, Weissman’s success comes down to the power of process discipline—sticking to the strategy, even when the market is volatile or after a string of losses—and maintaining the mental fortitude to follow through.
By focusing on these core principles—managing risk, adhering to a backtested system, adapting to volatility, and maintaining emotional discipline—traders can build a sustainable trading practice that focuses on long-term profitability rather than short-term wins.
