Many traders do not like to be accused of gambling. But gamblers are exactly what we are:
-We place capital at risk on uncertain events.
-We have no control over the outcome.
-There is no guarantee that we will make money in the long run.
Clearly, we are gambling. So why the negativity?
One reason is because of the negative connotations of a gambler.
We think of drunk, unkept and unshaven old men, sitting around the bookmakers betting on horses, or feeding the FOBT machines and losing their cash.
But unlike gamblers, we are not losers.
Whereas in gambling, the odds are set for you (by the house – which does always win in the long run), in trading – the odds are set by us.
Think about it: we have control of our entry. We have control of our exit. We have control of our emotions, control of our discipline, control of our position size.
Yet all anybody focuses on the one thing we cannot control… the outcome!
Why the outcome is not important
The outcome is not important. It is in the long run – do not get me wrong – if in the long run you are not making money then that is a serious problem.
But if you have three bad trades, does that mean something is wrong?
One reason many traders struggle to make money is because they consistently system hop. They try a few things, and tinker around, and then when it stops working for a few trades – they run somewhere else and try that.
I am convinced you could give people an exact step-by-step guide to making money – and out of 100 people, ten might listen, five might give it a go, and one person might stick to it after a few losing trades (in fact, I have – you can download my step-by-step guides here). This is why 90%+ of traders do not make any money.
It is not the competition from elsewhere that beats them. It is the competition within themselves.
The struggle to control emotions, and the struggle to remain consistent, is a struggle for many traders. If you cannot get comfortable with a few losing trades, then you are probably trading too big.
You need to manage your positions to a point where losses are not outcome dependent. If you put 20% of your capital into a single trade – then you can bet you are going to be very heavily invested in the outcome. But if this was 2% – would you be so bothered?
Position sizing is the key to trading success.
I have never heard of anyone going bust from trading too small. In every instance, the factors were either trading too large, or leverage, and huge unexpected volatility. Put them all together and you have the very serious potential for a blown-up account.
Trading is gambling
This is something all traders need to accept. This is not investing where we are analysing the fundamentals and taking a position based on sound research methods. This is pure gambling where we believe our trading system will deliver an edge in the long run.
Backtest your methods, and if it does not generate an edge and provide alpha – then ditch it.
Because that really would be gambling.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.