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===========================================      Thursday, December 26, 2002
 
Gambling with a Stock Market Approach

Hello everyone,

I hope you enjoyed your Christmas evening.  I certainly did very much.  You see, I'm Jewish, but our Christian friends invite us over their Christmas and Easter dinner and we invite them over for our Passover and Rosh Hashanah (new year) dinner and we have a great time together.  I believe that if all the 3 religions of the holy city of Jerusalem would behave this way, most of today's religious conflicts would have been resolved and the world would have been a much more peaceful place to live.   It's a matter of attitude and good will.

Now, to our today's subject, which explores gambling strategies with a stock market approach.  Point and Figure charting has been around for nearly one hundred years as a stock  charting system. Its main function is to clearly show previous high and low prices of stocks. This makes it easy to see when a stock makes a new high or anew low - the breakout. The reason that this is important is that a stock making a high is expected to
go higher and conversely, a stock making a new low is expected to go lower! Tracking
trends can be profitable.

When used to chart a stock, there is no time line on the horizontal "x" axis as is the
usual case with a stock "bar" chart. The stock analyst using a P&F chart is mainly interested in viewing graphically the current price of the stock in relation to its prior highs and lows. You can readily see where the lows and highs occurred in relation to the current price. An "X" is entered when the stock advances in price and an "O" is entered when a stock declines in price. Xs and Os are entered in alternate columns. In no case do you ever have Xs and Os in the same column. When a price has topped out at a price, you move over one column to the right, drop down one square (representing the lower price that has gone down by one unit) and enter Os as the price moves down. This continues until a new low is reached and the price reverses by three squares (units). At this point, you move over one column and up one square and start entering Xs as long as the price is advancing.

No reversal entry is made unless a move of at least three units is made. A unit could be one dollar, one half dollar or one eighth of a dollar or any other unit depending on the price of the stock. The P &F charts are normally made on graph paper with small squares. Each square represents a unit of price. When prices go up, we use Xs to indicate the price increases. When prices go down, we use Os to indicate the price decreases. Vertical columns of Xs and Os alternate. We move one column to the right each time there is a change in direction - from up to down or vice versa. Xs and Os never appear in the same column. Each column represents an up move or a down move. A column cannot represent both.

In charting stocks there are never less than three squares of Xs or Os in a column. Therefore, you can see that it takes a price reversal of at least three dollars to record a
reversal in a stock price's direction when each square represents one dollar.

The following example is given of a stock chart recorded in the P&F method:

40                           X
39                           X
38                           X
37                           X
36                           X <Breakout -buy point
35   X         X         X  
34   X   O   X   O   X
33   X   O   X   O   X
32         O         O
31                               < Downside breakout -  sell point

The stock price chart is started at the price of 33. This represents the price when you decided to start charting the stock by the P&F method. The time period involved does not show up on the chart at all. The price advances from 33 to 35 (Xs go up and Os go down). At the price of 35, the price turned down to 34, then 33, and then 32. When the direction changes from up to down or down to up, you move over one column to the right and one square down or up as appropriate.

It should be noted that the decline to 32 would not be posted until the price actually went down by three units - in this case three dollars. The next move was up from 32 to 35 where it was turned back once again. Notice that the resistance on the upside is at 35 and the support on the downside is at 32. Once again the price declines to 32 and once again it receives support here and the decline is stopped. On the third advance to 35, the price breaks through the "congestion zone" (commonly called a "breakout" in stock market terms) and goes to 40. Notice that if a move of three units, either up or down, has occurred, then any additional move in that direction is posted as the price moves by one unit or one square.

The breakout at the price of 36 is the buy signal in terms of the stock speculator.  This type of breakout will also be the signal to bet when applied to roulette, baccarat, or craps. Once an upside breakout has occurred, the stock is held until a breakout on the downside has occurred.

Now, lets say that you are playing baccarat or craps. Instead of posting Xs representing rising prices or Os representing lower prices, you post Xs representing wins for banker (or passes) and post Os representing losses for bank (or conversely wins for player or don't pass). Each ,"X" represents a win for bank or pass and each "O" represents a win for player or don't pass. The key idea is to use the P&F chart to determine the trend. The signal to bet on banker is when a higher level has been attained than on previous levels which have been reached. The levels in this case (as price levels are measured in the case of stocks) are not considered.

It is simply the relationship of the wins and losses which are considered. The truly amazing thing about its use in gambling is the fact that the patterns made by the gambling decisions cannot be differentiated from that of stock charts. They are that similar. You can test this idea by tossing a coin and recording heads and tails. You too may be amazed at the results you achieve.

Consider the following pattern using Xs for Banker and Os for Player decisions:

                 X
                 X <Shows winning bet (1st bet)
                 X <Breakout signal --bet on bank next decision
X      X     X
X O X O  X
X O X O  X
    O    O

There are differences in how the P&F is played for gambling purposes. First of all, you do not wait for a change in direction of three units (three consecutive bets) to occur to post the change as with stocks. You post an X for the bank or a O for player each and every play. This procedure tracks the changes faster and simplifies the record keeping.

Secondly, changes in direction - that is if bank won the previous decision and player wins the next decision, the decision is recorded in a new column to the right.  Consequently, many columns may have only one bet recorded in it. A pattern such as the following frequently develops:

           X     X     X     X     X    X (The X and 0 are alternating wins for banker and player)
           X  O    O     O     O    O
X   O  X
X   O  X
X

The "X" represents a win for bank (moving up) and the "O" represents a win for player (moving down). Do you see a pattern here? The author bets the "before last" alternating patterns.  The above pattern shows the following win sequence: bank, player, bank, player, bank, player, bank, player, bank, player, bank.  You may play the alternating bank and player decisions after having observed four alternating decisions. This is a side bet, however, to the major thrust of the Point & Figure system. Played III the normal way, however, this pattern keeps you even If you are playing flat bets. That is, if you are in a major up trend (bank is winning) you win on bank, lose on player, or vice versa, until the major trend resumes or reverses. If you played the alternate bank and player pattern, you have an additional profit.

You start betting and continue as long as the breakout bets are winning. You stop betting only when a breakout occurs in the opposite direction. At that time, you reverse your bets. If you were betting on bank and a downside breakout occurred, you would then bet on player.

By betting based on the trend breakouts, you greatly improve your chances for a winning session. You will be betting only in the direction of the winning trend.

A variation of the play described above is to play the breakouts only. By this I mean you quit playing bank or player as soon as you have one loss. If an upside breakout occurs for bank, you bet bank until you win. This could be on your first bet or your tenth bet. It makes no difference. You resume betting only when anew breakout occurs. This could be in either direction - bank or player or pass or don't pass.

Here is an example:

        X
        X O    O -Signal to stop betting
        X O    X -Signal to bet bank
X O X O
X O X O
X O X O
X O X O

Now let us examine the above situation. The X in bold print shows where the signal to start betting bank occurred. You win the next two bank decisions. But once the first player decision wins you immediately stop betting bank and wait for a new breakout. The O in bold print shows the first loss to player that is your signal to stop betting bank and stand aside waiting for a new breakout. If you continued betting bank, you could be betting for the next six bets and lose and yet be within the trend indicated by the breakout. So, you can quit while winner and start betting when a new pattern develops. This is a method to avoid the large thick "congestion" zones whereby the number of decisions from the low side of the zone to the high side consists of many decisions. Many times this zone is only two or three decisions thick and does not represent a danger. In other words, if bank has won ten consecutive decisions, and player starts to win, it would take ten consecutive player decisions to occur before you would have a new "breakout" signal to start betting player. This situation occurs more often than you would believe. This is a safety valve to help you keep wins and to lessen
your potential drawdowns.

You may experiment and define other rules with which to play this time method of tracking stock trends.

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Wishing you and your families a very happy, healthy and prosperous new year.
Until next week,
Izak

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