The5%ers Blog

Reducing the Gambling Side of Trading

Gambling in forex trading

Taking the guess work off Forex trading

Everytime I find myself in casual company, introducing myself and telling people what I do for work, I’m usually met with the same response:

“Oh, you’re a gambler, right?”

I can’t count how many times I’ve heard this from new friends or acquaintances and it got me thinking recently that maybe there is some truth to the notion of trading as gambling.

Gambling Elements

When I go through and analyze the profession, I do see gambling elements, but mostly, it’s risk management work. For the majority of the time that I’ve been trading, I’ve been relying on my skills and profit expectancy and how to guard my financial investments. I haven’t been going at it randomly, as if I was gambling.

Therefore I’ve concluded that the answer to the question if trading is gambling is actually pinned in the question itself. When someone doesn’t know something about a profession but is thinking of how to make a living from it, it can be considered gambling. When you have no knowledge and you jump into a new set of rules for any kind of business, well, that is considered gambling.

Let’s say you’re called to court but want to go without a lawyer defending you. You want to defend yourself in front of the judge because you’re willing to take a gamble despite lacking necessary legal knowledge. This is an extreme example, but when non educated people refer to trading as gambling, they just don’t know what the profession actually involves.

Enough Blame to Go Around

There’s more people at fault here though because the sad fact is that many traders who claim to be traders, are actually trading as gamblers. So there is a bit of truth in the statement strangers present to me.

So why are so many financial traders considered gamblers? Most people don’t have a solid definition of what traders are doing. Most lay people outside of the industry just don’t understand all of the aspects and intricacies of the profession.

On the peripheries of trading, gambling is when you trade without proper knowledge of your trading. For example, lacking an education and lacking practice and then putting your money down is gambling. Here a few other types of gambling in trading:

Market Prediction

This one is exactly how it sounds – thinking that you can predict and accurately forecast the market direction. This is gambling because prediction of the market is simply not a realistic way to trade. If prediction was possible and even probability wise possible, the market would be a completely different business.

Even if you have a way to predict the market and it seems to work for you most of the time, you’re still acting with a little hint of gambling. You’re only relying on statistics which at any time can go against you. For example, you say you know how to play roulette because you have studied and know all of the statistics. But even in doing so, sticking to your prediction will cause failure an unpredictable amount of times.

Stubbornly Holding on to your Biases

The next type of gambling we’ll outline is clinging to your belief that the market will go a certain way according to your preconceived bias. In this scenario, if you don’t leave yourself enough margin for error and you go all the way to loss or win in a binary way of thinking, it is a type of gambling.

Avoiding Losses or Not Placing a Stop Loss

Possibly the most severe form of gambling in trading, avoiding taking losses or placing proper stop losses on your trades can have devastating effects on your portfolio. Once you enter the market, you don’t have a plan for how much you’re willing to risk. As a proprietary forex trading fund manager, I’ve seen so many people who don’t respect their own resolution to take a proper stop loss. Time and time again, they go all the way to the definite loss of their portfolio capital and take impossible recovery points after their losses.

Gambling in this way is so destructive because it kills your confidence when you see your trades quickly eating away at your funds. The lack of success and the anger and despair at failing will lead you to feel broken and without much self esteem. In this scenario, you put so much on the table and open yourself up to serious troubles.

Less Destructive but Still Trouble

A lighter version of avoiding stop loss is avoiding having a trading plan or risk management plan. These two strategies should define your trading routine and the loss of both or just one leaves you in the market as a gambler, untethered by pre drafted strategy and considerations. You are floating unprepared and are lost as a gambler.

Shock Treatment

This article underlines a very negative picture of how most traders are because it’s important to be tough on yourself and to shine a light on the elements that might make you a gambler in order to then reduce the tendencies. Ultimately you want this job to be something you can rely on and live on. Take this as shock therapy to get you to cut out and reduce as many gambling tendencies as possible.

Ways to Correct and Alleviate Gambling

For gambling due to a lack of education, it’s quite simple. Go back to school, learn, and practice. We’ve outlined the importance of good guidance in previous articles. Open yourself up to more points of view, input from other traders or mentors, and new and improved methods of learning.

For the locked bias element, there’s also an easy fix. Be open and look for confirmation before you enter the market. Look for confirmation everywhere in order to prove or disprove your actions. Unlock your position and then enter with confidence.

There’s no solution for market predictions because it’s something you should never have been doing in the first place. Don’t predict the market because the market is unpredictable. Even via statistics, there’s no feasible way to predict movements. If you try to do so, you might also suffer a long drawdown before your prediction comes to fruition. Bottom line is, don’t predict it. It’s not predictable. Period.

Gambling for not having proper risk management is maybe the hardest part for your mental challenge during trading. Just knowing that the cost will be devastating and bring distress to you should be enough of a red flag for you to avoid this behavior. If you’re fully aware of the damages it will bring, you should be more motivated to develop a complete risk management guide that is uniquely suited to your trading personality. Work on it, tweak it, perfect it. Keep it ever evolving and changing according to your needs and advances.

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