Michael Storm– Follow Michael on Twitter
If you are going to be successful in trading there is one thing that is essential for you to get absolutely clear and if you do not you will face trouble. Trading is NOT “gambling”!
Unfortunately many people think it is. This just shows a deep lack of understanding on their parts. IF, you think that trading is gambling you are setting yourself up for a self fulfilling prophecy of failure. Now, before we begin, lets answer this first: Can trading ever be gambling? Yes! Yes it surely can. Did I just contradict myself? No, I certainly did not. Lets did a little:
First knowledge is a powerful tool. But knowledge alone cannot provide what is needed to succeed in this business. Wisdom is knowing what to do with the knowledge (the facts). And experience is another essential portion of what we need. IF a trader does not have knowledge or wisdom (which can be obtained through a mentor if needed) and this trader is taking trades on “whims”, tips, etc… and does not really know what he is doing or understands why, then it is gambling. What is worse is combining this with foolishness. I knew a trader once (beginner) who went long a thousand shares of a high flying solar stock (priced well above a hundred per share) who entered the trade as a day trade. He held it till it fell 60 points (he had no stop in place) and lost a ton of money. He is now OUT of the business forever and probably never to return and rightly so. He switched time frames (held it for many days), because he couldn’t bring himself to loose a few thousand dollars. He had no stop loss, (shear madness). He couldn’t manage risk or kill the trade until it was simply unbearable any longer. His wife probably killed him or left him. Friends and family ridiculed him for sure (if he had told anyone else). My point? Take note of this and purpose in your heart that this will not happen to you. DO NOT GAMBLE. Obtain the knowledge, obtain the wisdom, obtain the patience and obtain the discipline! Discipline to get in when your master trading plan that you have derived says….”time to get in!” Discipline to take your stops even if it hurts you. Discipline to take your profits when you can and not be a greedy hog about it. Discipline my friends. Discipline the GOLDEN KEY.
OK, back to the issue. Trading is RISK MANAGEMENT. Pure and simple. It is the calm calculated taking on of risk with a HIGH probability of a successful outcome. The risk should be smaller than the reward. Hence, this is known as the risk reward ratio. If you are risking $100 to make $300 it is a 1 to 3 risk to reward. An acceptable ratio.
Now, lets talk expectancy. IF, you have come up with a trading plan based upon patterns, price action, support, resistance, Elliot wave theory, Fibonacci retracement levels, WHATEVER… whatever strategy that you have developed over time and you have an expectancy somewhere between 66.6% as the lowest and lets say a high of 90% at the highest: trading god status (I say this jokingly). This expectancy is your win/loss ratio. You are not a fool and do not believe that you will win every single trade forever and ever. That is just not rational or realistic. But based on how your days, weeks and months are going for you, you see yourself within these parameters (these are my parameters…. On a bad week its 2/3rds. On a great week it is 90% but my average is around the 75% area) Then you know you have 2 good things going for you:
#1. You have a high risk to reward ratio
#2 you have high expectancy.
Lets talk about the 3rd essential. CUT YOUR LOSSES SHORT! Kill them! Your trading plan is your Master. Got it? You are the manager. Your trades are employees. You are an expert at Hiring and firing. You have hired this employee for ONE purpose. He is to PERFORM. If he does not perform he must be canned. It is that simple. There are lots of others out there, do not tie up precious working capital holding on to a looser, let him go. So, if you can CONSISTENTLY do this as a scalper taking 6, 10, 13, 17, 25 pips here and there wherever you can find them, and you let your losses go at -3 here and -5 there and not let this get out of hand where you start losing 10,15, 20 pips (this is too high) then look at what shall happen to your account! Your making 100 pips a day on 10 trades. Your losing 15-20 pips a day on 3-4 other trades You are net profitable by 80-85 pips a day! This is what it takes. It is called consistency.
So, is trading gambling? It could be to the ill informed and uneducated. To the impatient and undisciplined trader who is simply looking for excitement and thrills.
Is it gambling to a professional trader? One who is consistently profitable day in and day out? One who has mastered his emotions of fear and greed and they are basically dead? One who based on TIME and PROVEN strategies has his sharpe ratio high and his expectancy too? No, it is simply managing risk and being PAID for it. For me I see this thing as clearly as day and night. The difference is literally that wide for me. But unfortunately others may not see it that way. SO, I am going to quote the bible here: Romans 14:22 “Hast thou faith? have it to thyself before God. Happy is he that condemneth not himself in that thing which he alloweth“
How does this apply? Well, if you have faith and understanding in this matter, that is wonderful. Keep it for yourself. You can be HAPPY in this. You can even TRY and share it with others, but I have found a great lack of understanding in others. And I see a lot of different reasons for this. The main ones (I think) are this: The first is simply ignorance coupled with an unwillingness to even bother to learn the difference. The second is that people just simply think that they are right and everyone else is wrong. And once someone takes a stance with you and the lines are drawn, it is hard to get the other person to admit that they are wrong in their view and change their view over to yours. Maybe people are afraid of admitting defeat, or maybe they are just happy with their views and want to condemn you for being a trader, who knows….
If you as a trader think that trading is the same as gambling I strongly urge you to change your beliefs as soon as possible or quit this business altogether for I believe that you will be doomed to failure with this belief in your heart. Thanks for reading and till next time, Happy trading.
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