Professional Documents
Culture Documents
What is Gambling?
Gambling is nothing but writing off money and risking it in a bid to make
more money by sheer luck. You are well aware that this money can all be
lost as gambling works on pure probabilities. You lose money if the
probability is not in your favour an edge that is always favourable for the
house in the long run.
There are gamblers like Bill Benter and Edward Thorp who have gone on
to make millions of dollars by mastering the art of probabilities. Trading is
not this easy a game.
“Trading is only gambling if you don’t have a plan and stick to it.”
Is Trading also Gambling?
Trading Gambling
➢ Sound risk management ➢ No risk management
➢ Sound trading plan ➢ Greed prevails
➢ Focus on consistency ➢ Focus on quick money
➢ Trades based on data and ➢ Gambles based on emotions a
facts ➢ Gambles on hope & luck
➢ Trades based on facts/price ➢ No discipline
➢ Improvises from mistakes ➢ Erratic
➢ Trades high probability ➢ Thought process –I win if I win
➢ Thought process – I would ➢ Random
win ➢ Works on pure probabilities
➢ Growth is gradual and gut feeling
➢ Analyse based on back- ➢ Look for excitement
testing and experience ➢ Get rich now
➢ Treated as business ➢ Random outcome
➢ Long term goals
➢ Variable expectancy
“In trading/investing it’s not about how much you make but rather
how much you don’t lose.” – Bernad Baruch
Why do Traders become Gamblers?
Winning edge
Traders tend to think like gamblers because of the sub conscious mind
that is driven by greed and need. Casinos work on the concept of having
an edge over the players in the game. This will help to make a killing in
the long run. The games in the casino are skewed to win in the long run.
Traders do need to have an edge to win but the mistake happens when
you want to win all the time. You want to win big all the time as well.
Risk management
Even casinos work on risk management and table limits to contain losses.
Traders fail in this aspect miserably and lose big because of poor money
management and position sizing.
Trader mind-set
Have a trader’s mind-set and use human behavioural biases. Let’s say for
instance if you are a trend follower, you do well when markets collapse
because of negative news. You tend to do well because the mind of all
traders, investors and the market sentiment in general are all aligned
together.
Similarly you should have an edge as a trader that works on different
market sentiment as markets are always dynamic. A trader wins if he has
the knowledge to understand market sentiment and make money be it
trend following or mean reversion.
Risk Management
As a trader you always carry this in mind that you can go wrong in a trade.
You should have a risk management system that does not wipe out your
trading account in such instances. You can use several methodologies
like position sizing, stop loss and capital deployment to mitigate when
your view is wrong.
Back-test strategies
Always work on a strategy that is back-tested in different market
conditions. The back-testing has to be widespread so you can identify
winning probabilities of such a strategy in bull runs, bear markets and
consolidation phases.
Strategies could either be designed by you or by a trader has achieved
great results from a strategy already back-tested. It is important to test the
results yourself if you are using a strategy designed by another trader.
Casino mind-set
It is important to trade like you were the owner of a casino and replicate
the casino model in trading. Most of the traders lose because of lack of
knowledge/trading plan so it is important to educate yourself with all
necessary tools and resources before you trade.
Even if you are on a 50% winning probability plan you are still good if you
have the right risk reward plan. The problem lies with the emotions that
drive your trading decisions when trading. This results in you losing big
when you are wrong and winning small when you are right.
Emotions always drive wrong decisions in markets due to the human
nature that is behind the process. You look up to instant gratification
when you are winning and cut winners small. You look up to hope and
fear of losing money when you are losing make you hold on to a losing
trade expecting a reversal.
If you need to apply the same winning edge like a casino would do you
need to have an edge here when you trade. Professional and successful
traders always trade on high probability winning trades on repeatable
price patterns. These price patterns are formed in the market day in and
day out and you should have a trading plan that can identify this
repeatable pattern.
Let’s say if you are someone who trades supports and resistances, you will
look for price patterns that have tested this level at least once before.
When you see price heading back to these levels and bounces off from
support or resistance you enter the trade. You enter the trade because
there is a high probability of you winning because the price pattern could
repeat itself.
A professional trader would also cut losses to minimal if the trade went
wrong and move on to the next opportunity. There would be no strings or
emotions attached to a trade by a professional trader. Yes, a professional
trader would study why price behaved in such a manner to refine their
strategy if needed.
The above example gives you a statistical edge because you are trading
on repeatable patterns which itself increases the probability. Traders with
an edge look at winning probabilities in the long run rather than look to
win them all and win them now.
Conclusion
Trading is a profession that requires utmost dedication, passion for
trading and zeal to achieve great heights. It is made to sound like
gambling when traders display gambling tendencies instead. I’m sure we
have cleared the air around trading as a noble profession and how you
can trade like a pro to achieve great heights.