If you believe stock trading is similar to gambling, you definitely want to explore the possibility of counting cards. The slightest suspicion of the presence of a card counter, will have the casino pit crew swarming. The house always wins – as long as no one is counting cards.

Before we get into this, here’s a quick run down of simple Hi-Lo card counting (the most popular strategy). You assign points to the cards you see:

• Cards 2-6 have a value of +1.
• Cards 7-9 have no value.
• Cards worth 10 have a value of -1.
• Aces also have a value of -1.

In this strategy, if the ratio of high cards to low cards is higher than normal (that is, there are lots of high cards still in the shoe), the player can make bigger bets to increase the amount they can win when the deck is favorable. A deck with a positive number is good. The higher the number, the more you want to bet. The higher the number, the more high cards are left to be played.

In the stock market, the equivalent of counting cards in a casino would be engaging in activities or strategies that seek to gain an advantage through careful analysis and tracking of financial data, market trends, and other relevant information. Anything to increase the odds of success., right? 

Some of the traditional strategies include:

1. Fundamental Analysis: This involves analyzing a company’s financial statements, earnings reports, industry trends, and other factors to determine the intrinsic value of its stock. Investors who engage in fundamental analysis try to identify undervalued or overvalued stocks.

2. Technical Analysis: Technical analysts study historical price charts, trading volumes, and patterns to make predictions about future price movements. They look for trends, support and resistance levels, and various technical indicators to inform their trading decisions.

3. Insider Trading: While illegal insider trading involves trading on non-public information, legal insider trading occurs when company insiders, such as executives and directors, buy or sell shares of their own company. Some investors may monitor insider trading activity as a potential signal of a company’s prospects.

4. Algorithmic Trading: Many professional traders and hedge funds use algorithms and computer programs to execute trades based on predetermined criteria, such as price movements, volume, and market conditions. This can be seen as a way to gain an advantage through automation and data analysis.

5. High-Frequency Trading (HFT): HFT firms use advanced computer algorithms and high-speed data feeds to execute trades within milliseconds. They seek to profit from small price discrepancies that occur in very short time frames.

6. Quantitative Analysis: Quants develop complex mathematical models and algorithms to analyze vast amounts of data, identify patterns, and make trading decisions based on statistical analysis.

It’s important to note that while these strategies involve careful analysis and the use of data, they don’t guarantee success in the stock market. The stock market is influenced by a wide range of factors, including economic conditions, geopolitical events, and investor sentiment, which can make it unpredictable. Additionally, there are strict regulations governing financial markets to prevent illegal activities such as insider trading.

But the above is not really the same as counting are cards, now is it? 

I think we should approach this in a different way. Let’s look at how you can tell if someone is counting cards. Even with different counting systems, counting always points in the same direction. Card counters will start increasing their bets once there is an imbalance of high vs. low value cards in the remaining unplayed cards. If someone is betting high when the count is high and lowering the bet when it drops, then perhaps he or she is counting. If the person is sitting out when you are sitting out, then the person might be a counter as well. The surveillance cameras are looking for players that always place a minimum bet after the shuffle, doesn’t drink or tip, watches the cards closely and don’t engage with anyone, then suddenly leave for a bathroom break when the count is negative. That’s exactly the behavior you would expect from a professional trader. I bet card counters would be great day traders.

So, how would one go about this in practice?

First we scope out the least profitable casino. We want to be in an environment that is conducive to card counting. According to MSCI, the US market is currently one of the most favorable places for equities. Just as the casino assumes that they will win over time, we assume that the US indices will gain over time. (note that the living indices where bad companies are kicked out of is often referred to as “the market” even though it’s a selection of the market). This means that the odds of upward fluctuation is higher than the downward fluctuation (you can even add inflation and business drive as arguments for the upside). That’s great, let’s start counting. But wait… what should we count?

Since we assume that the main index will increase in value over time, we can simply monitor it. When the house edge flips in favor of the player we increase our exposure (buy more shares). In other words: buy low – sell high. Heureka! It’s easy to do – but also easy not to do. For a monthly investor, it would mean cutting down on the shoe allowance during the negative months and to use that money to increase the exposure to the market instead. I don’t know anyone who does that. But then again, I don’t know anyone that count cards either.