I use stop-losses when gambling. In Part 1 of the High Stakes Put Bet video, you saw me set a stop-loss when I was up. That’s why, near the end, I withdrew the pass line odds once I hit the final put bet. If the put bet would have hit, I would have positioned the odds back. Sadly, it didn’t hit.
This article goes into great detail about the stop-loss. If you want the short and sweet TL;DR version, just scroll to the very bottom.
WHAT IS A STOP-LOSS?
A stop-loss is a loss mitigation tool where a player will implement a policy or goal of discontinuing play if certain conditions are met, with at least one of the conditions being one or more losses. On its face, a stop-loss is a simple thing, for example, ‘if my $500 bankroll goes down to $250, I’m walking away’.
While the idea of stop-loss can be simple, what separates the savvy players from the casual players is that the savvy players have a deeper and more intricate understanding of an issue, even if that issue appears simple. That’s not just true of gambling games, but of anything in life.
A few years ago, I was trying to convince a pizza shop owner to let me franchise his business. We had a business dinner, and over our dinner, we didn’t talk much business. All we talked about was pizza dough. His passion was pizza dough and making pizza.
If you think about it, pizza dough is a simple product involving just a few basic ingredients: flour, yeast, water, and salt. The other ingredients and variations are just added for flavor. What separates a master pizza maker from your typical casual pizza restauranteur is the ability to understand that the four ingredients are a diverse and complex pathway to artistry.
We spent about 90 minutes of the two-hour dinner just talking about pizza dough. Around dessert, he spent 30 minutes talking about how he uses a special type of water and how the minerals in water and can affect the end product. This guy had a masterful understanding of his craft.
Generally, that’s what it takes to become really good at something. The practitioner must be willing to delve deeper into the issues and have a greater level of understanding than most people are willing to undertake.
So if you want to increase the dough you win at the table and start thinking like a savvy player, keep reading. Let’s take a deep and intricate look at the stop-loss.
THE TWO MOST COMMON REASONS FOR USING A STOP-LOSS
Players can implement a stop-loss for any number of reasons, but the two most common reasons for utilizing a stop loss is: 1. the loss or losses are contributing to a decline in judgment, and the passage of time will hopefully allow rationality to return; 2. any continued losses will have an outsized effect on the player.
If you’ve ever traded stocks, those reasons may sound familiar to you. In the case of #1, it’s not just traders who exercise stop-losses; governments and markets will sometimes force a market halt in the hopes that rationality returns: Securities and Exchange Commission approves ‘flash crash’ circuit breakers.
If a stop-loss is good enough for the SEC, then you would be wise to use a stop-loss, also.
TYPES OF STOP-LOSSES
Stop-losses can be broken down into two main categories: hard stop-losses and contingent stop-losses. The latter is sometimes referred to as a ‘soft’ stop-loss because it’s easier to remember ‘hard’ and ‘soft’; also because it probably sounds cool.
By the way, when you refer to stop losses in real life speech, just refer to it as a plain old, ‘stop-loss’.
The Contingent Stop-Loss
A contingent stop-loss is a stop-loss wherein the player ceases play on the occurrence of one or more losses and at least an additional second factor that is expressly stated.
Examples of contingent stop-losses include,
- When I’m down to $500 of my buy-in, and I feel tilted, I’m going to stop playing’
- If I’m down to $500, and I’ve been playing for at least 1 hour, I’ll quit’
- If another point-7 out happens, I’m quitting’
- I will only do one additional buy-in if I go bust on my first buy-in
- I’m up by $500, if I lose $250 of my profits, I’ll quit because I’ve reached x goal
In the last example, a contingent stop-loss is can also be used to protect profits.
The Hard Stop-Loss
The hard-stop loss is a stop loss wherein the player makes a determination that the player will cease play when their bankroll has reached a certain amount. Usually there is not a second factor expressly stated.
Examples of a hard stop loss include,
- When I lose $200, I will stop.
- I bought in for $1000, if my bankroll reaches $500, I will stop.
- I’m up $500 on my original buy-in, if I lose half of the profits ($250), I’ll stop
Even though the second factor is not expressly stated, it does exist. The player, is in fact, anticipating an additional condition, but the condition is reflected in the dollar figure, rather than expressly stated.
The Second Factor in a Hard Stop-Loss
On its face, it appears that the hard stop-loss does not have an additional second factor; however, appearances are deceiving. The second factor is ‘impounded‘ in the value at which at the stop-loss is exercised.
As an example, take the first hard stop-loss I listed above, ‘When I lose $200, I will stop’. The impounded second factor might be that a player knows that if he loses $200, he goes on tilt. He might not say it, admit it, or he might only suspect that something is ‘off’ about him when he loses $200. He just intuitively knows that if he loses $200, he becomes a different beast.
This unstated, but impounded condition, can be seen in the form of speech. For example, rather than going into an exposition with his friends about how he becomes tilted when he loses $200, a player can just simply tell his friends, ‘I’ll stop when I lose $200’.
DIFFERENTIATION BETWEEN A STOP-LOSS AND BANKROLL LIMITATION
What is a Bankroll Limitation?
A bankroll limitation is a cap on the amount of money that a player will contribute to his or her bankroll. An example of bankroll limitations might be something like,
- I am only going to play with $500
- I’ll only buy in twice, for $500 each time
- I’m only taking $500 to the casino
- If I lose half my buy-in, I’m stopping for the evening
- If I lose $200 my $400 bankroll, I’m going to stop gambling
Notice that the last example sounds suspiciously like hard stop-loss. That’s because the last condition can be either. It depends on the intent of the speaker. The main distinction between a stop-loss and a bankroll limitation is that a bankroll limitation has no gambling or bankroll related reason for a stop other than the bankroll cap.
Sometimes, players will give a reason that is not related to gambling, such as, ‘if I lose half of my $1000 buy-in, I am going to stop because I need $500 to pay my rent.’ This is probably bankroll limitation because realistically – or hopefully – the $500 was never in play. The player never intended to gamble with the $500, hopefully.
The main reason I distinguish between a hard stop-loss and a bankroll limitation is because of this very important rule: do not ever buy-in with money that you do not intend to gamble with.
I can’t emphasize enough the importance of this rule. If there is one thing you take from this article, it is that rule. I discuss this in more detail below.
Don’t Mistake a Bankroll Limitation with a Stop-Loss
It’s important to know if you’re playing with a stop-loss or bankroll limitation because it changes the amount of money that you will gamble with, which then affects your number of available units, which then alters your probabilities of winning, losing, doubling up or going broke. It also affects your Kelly Criterion (see below).
If you haven’t read my response to Sherri, read it here.
Sherri had what she thought was a stop-loss, but it was really a bankroll limitation. She went to the casino with what she thought was $400, but in reality, because of her bankroll limitation, she played a $15 craps game with 2x max odds on a $200 bankroll. Granted, in the long run, she’ll do fine, but she has to understand that when you bring $200 to a $15 game and play 2x with an additional come+2x odds (exposing $90 of a $200 bankroll in one roll when two points have odds), she’s going to have sky-high volatility.
You have to be ready to ride that wild roller coaster that’ll probably be a very short ride.
Note that the distinction between a stop-loss and a bankroll limitation is really a subjective determination that depends on the intent of the declarant. It’s not an objective determination. So whether the stopping point for Sherri was really a stop-loss or bankroll limitation is something only she can know.
Here is where I introduce my readers to an important concept, and I’ll touch on it lightly for now…Kelly Criterion.
Kelly Criterion is the statistical expression of optimum betting size when the player has an advantage. While craps is a negative expectation game, with loss rebates, aggressive comp hustling, and other factors, it may be possible to neutralize the minor house advantage if the house edge is thin enough. Also, sometimes a casino will run a craps promo that definitely puts the game into positive territory. In those cases, Kelly Criterion applies.
Just think of the ups and downs of gambling as a roller coaster. Whenever you go ‘up’, there will probably be a corresponding ‘down’, and whenever you go ‘down’, there will be a corresponding ‘up’ (know that the corresponding ups and downs are not predictable and can happen in any sequence or order).
The problem with going ‘up’ and ‘down’ from a bankroll limitation and short stack perspective is that no matter how high ‘up’ you go, you can always continue to play, which means that you can always have the corresponding ‘down’. However, the same is not true on your ‘down’. If you do ‘down’ too low, you reach ‘ruination’, which is the technical term for ‘broke’.
If you reach ruination, you then can’t go ‘up’…because your ass is broke.
The solution to this problem might be to bet smaller amounts; however, you also don’t want to bet too little because then you’re not getting enough benefit, especially if you are getting enough of a bonus to make your bankroll grow. The answer is somewhere in the middle of ‘too much’ and ‘too little’.
So to solve the problem I just described, Kelly Criterion is a formula that determines an optimum betting size for bankroll growth.
How Will This Be Relevant?
Just think of it this way…let’s say a host gets desperate for business and says he will give you cash, free play, comps, and rebates based on your play, and he will consider your free odds as part of your ADT. Well, you can’t get any of those things if you are broke because you aren’t playing. You don’t want to bet too little, but you also don’t want to bet too much because you’ll go broke. Kelly Criterion is a formula that helps determine the optimum amount to bet under those circumstances.
Later on, when we talk about comp hustling and maximizing comps, rebates, and free play, this becomes relevant.
The Major Rule of a Bankroll Limitation: Do Not Buy-In with Money that is Not Slated for Gambling, Which Is Likely to Happen if You Mistake Your Bankroll Limitation for a Stop-Loss
I harp on the distinction between a hard stop-loss and a bankroll limitation because this rule is the most important rule when it comes to the bankroll limitation.
Let’s recap: if you take $400 to a casino and tell yourself that you will definitely stop playing and go home if your bankroll dwindles to $200, and you have no reason for stopping other than that you’ve reached $200, that’s really a bankroll limitation.
That’s no different from saying that your gambling budget is $200. In that case, just buy in for $200. Don’t even bring the $200 that wasn’t slated for gambling.
When your stopping point is really a bankroll limitation, you are better off not buying in for the amount under that stopping point. Buying in with money that is genuinely not a part of the gambling budget – whether for the session, day, or entire trip – opens yourself up to unnecessary temptation and potential costs, for no apparent benefit.
When you want to avoid problems, it’s best to just remove the temptation.
Imagine this scenario…you have $1000 and of that amount, $500 will be used to pay your rent, while the other $500 is gambling money. Your budget is really $500.
You go to a blackjack table and buy-in for $1000. You’re unlucky (or maybe playing poorly) and you are down to $525. You bet $25, and you get two aces. You have to split, but splitting would mean that you now have to dig into your rent money.
Most reasonable people would never risk rent money to gamble, but in this case, because you bought in with money that was not a part of your gambling budget, you are now tempted.
There are other reasons to not buy-in with the money that you were never going to play with: you might be robbed, you might lose the money, someone might steal it, etc.
Just don’t do it. Remember the rule.
IMPROPER USE OF THE STOP-LOSS
When in doubt, it’s best to exercise the stop-loss. Your default position should be to exercise the stop-loss if you have a stop-loss.
However, be aware that improper – meaning not optimal – use of the stop-loss can cause problems.
Improper use of the stop-loss can cause additional damages to an existing position
Exercise of a stop-loss may trigger tax consequences that further erodes the player’s position. If players or traders habitually and mindlessly use stop-losses without proper planning, the tax consequences can be enormous, especially if the person elects to cash in a large amount of chips each time, and the casino reports the transactions to the IRS.
This isn’t theoretical speculation. I know professional gamblers who were audited by the IRS and couldn’t document their losses but had what looked like wins.
If you want to see panic, read this Reddit thread about traders who lost money on Bitcoin, but owe the IRS back taxes because of trades: bitcoin traders lost money but owe taxes. A lot of the Bitcoin traders would exercise stop-losses, either manually or via stop-loss order, to lock in profits or mitigate losses, thus triggering a taxable event. They never considered the tax implications.
Just be mindful of the tax consequences. This problem can be solved with simple planning. I won’t get into that point, lest I be accused of…oh, let’s move on.
Unexpected Costs Incurred
Another way that improper use of the stop loss can cause more damages is that the stop-loss can incur expenses. Here is another real example, as I explained to our reader Sherri…
This additional cost [of using the stop-loss] acts like a commission on the $225. Sure, the ‘commission’ might go to the gas station or the mechanic and not the casino, but that doesn’t matter. It’s an expense that diminishes your remaining bankroll. If you spend $20 worth of gas traveling to and from the casino, and your budget was only $400, that’s no different from a 5% commission, before you even hit the table. Hypothetically, if you decide that you will only play $200 each time, but it costs $20 worth of fuel or travel expenses, two trips to do battle with $400 will cost $40. That’s now effectively a 10% ‘commission’. In such cases, it’s better to make a single stand [and not use a stop-loss].
Loss of Opportunity for Profit
Finally, improper use of the stop-loss can deny a player the opportunity to improve their position. If the player has a stop-loss, there may be a legitimate reason to modify the stop-loss on the fly. For example, if you are playing craps next to a darkside player who doesn’t allow his 6 and 8 to travel, and he allows you to buy his 6 and 8 from him every time, assuming his bets were large enough, you would be crazy to leave the table, even if you approached your stop-loss. He’s giving you about 15% equity every time he sells you his bet.
Another time I was on a cruise ship and I was playing next to a lady who was betting $100 per hand, but she absolutely refused to ever double down. She just didn’t like doubling and thought that she lost way too often when she doubled. I asked her if I could incorporate with her whenever the opportunity arose, and she agreed. I didn’t have a stop-loss, but if I had a stop-loss, that would be a very legitimate reason to ignore a stop-loss.
This is an important distinction of a stop-loss, whether contingent or hard: if the player can honestly make a judgment as to the effect of the second factor on the player, and then make a sound cost-benefit analysis, the player would be wise to not exercise the stop-loss if the opportunity calls for the player to continue play. With a bankroll limitation, there should be no room for this judgment.
One of the most important aspects of exercising a stop-loss is that it is a tool of discipline. If you told yourself that you were going to stop, and you did stop, then that is a valuable show of discipline. The exercise of restraint and self-control is often reason enough to exercise a stop-loss.
Ask yourself if stop-loss is necessary. Be honest with yourself.
- Do you go on tilt easily?
- Are you susceptible to tilt?
- Do you get ‘crazy’ at the table as time passes?
- Do you have a weakness that could be mitigated with a stop-loss?
If you find that you would benefit from a stop-loss, implement it and use it. No one wins every single time they gamble. Anyone who claims to win every single time is lying, delusional, or trying to sell something. There’s nothing wrong with admitting that you will lose eventually, and when you do, you should have a plan.
By implementing a stop-loss, you can limit your outsized losses that are enhanced by tilt, so when your inevitable win streak comes along, it’s easier for you to get into positive territory.
Using a stop-loss properly will help you be a winner.
In this article, we discussed the stop-loss so that you could understand the nature and concept behind it. We only barely touched on how to actually use a stop-loss. After I release Part 2 of my High Stakes Put Bet video, I’ll explain how to effectively and optimally deploy a stop-loss.
In Part 2, I use a fluid version of the stop-loss that changes depending on the conditions. We will talk about that after you watch Part 2.
These types of explanations are always more helpful when there is a real-life example that you can see in action.
WARNING: Using a fluid, or changing stop-loss, can be dangerous and is not for everyone.
Afterward, in a separate article, I’ll show you how to bully your way into more comps than you deserve. It’s helpful and wise to have an understanding of stop-loss theory once I explain my methods to you.
Like I said at the beginning of this article, if you want to be good, you must be willing to have a deep understanding of the issues. If that’s not something you’re willing to accept, and you want the easy route, then this is really the only thing you need to know about the stop-loss…
TL;DR, the Simplest and Most Common Stop-Loss
Before you get to the table, tell yourself that if you lose $_____, you will stop playing. Once you lose that much, stop playing. That simple promise to yourself will save you money because you will save yourself from the monster that most professional gamblers consider to be the destroyer of bankrolls: tilt.
Notice I didn’t write ‘the easiest and most common stop-loss’.
I hope this article helps you. If you have any questions or comments, please leave them in the comment section below.