Many traders do not like to be accused of gambling. Butgamblers are exactly what we are:
-We place capital at risk onuncertain events.
-We have no control over theoutcome.
-There is no guarantee that wewill make money in the long run.
Clearly, we are gambling. So why the negativity?
One reason is because of the negative connotations of agambler.
We think of drunk, unkept and unshaven old men, sittingaround the bookmakers betting on horses, or feeding the FOBT machines and losingtheir 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 controlof 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 controlthe outcome!
Why the outcome is not important
The outcome is not important. It is in the long run do notget me wrong if in the long run you are not making money then that is aserious problem.
But if you have three bad trades, does that mean somethingis wrong?
Definitely not.
One reason many traders struggle to make money is becausethey consistently system hop. They try a few things, and tinker around, andthen when it stops working for a few trades they run somewhere else and trythat.
I am convinced you could give people an exact step-by-stepguide to making money and out of 100 people, ten might listen, five mightgive it a go, and one person might stick to it after a few losing trades (infact, I have you can download mystep-by-step guides here). This is why 90%+ of traders do not make anymoney.
It is not the competition from elsewhere that beats them. Itis the competition within themselves.
The struggle to control emotions, and the struggle to remain consistent, is astruggle for many traders. If you cannot get comfortable with a few losingtrades, then you are probably trading too big.
Position sizing
You need to manage your positions to a point where lossesare 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. Butif 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 toosmall. In every instance, the factors were either trading too large, or leverage,and huge unexpected volatility. Put them all together and you have the veryserious potential for a blown-up account.
Trading is gambling
This is something all traders need to accept. This is notinvesting where we are analysing the fundamentals and taking a position basedon sound research methods. This is pure gambling where we believe our tradingsystem will deliver an edge in the long run.
Backtest your methods, and if it does not generate an edgeand provide alpha then ditch it.
Because that really would be gambling.
Author Michael Taylors website http://www.shiftingshares.comcontains a number of tutorials on how to trade and invest as well as his freebook How to Make Six Figures in Stocks.
Originally posted here:
The Shifting Shares View: Is trading gambling? - Value The Markets
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