Trading can be a lot like gambling if you
let it be so. Some of the best traders in the world are also great poker
players, but there’s a big difference between how you trade and how people
gamble.
How can trading be gambling?
What I’m talking about is the average
trader out there that makes references to things such as “Well, I’m taking
high-risk trades, but I keep my stops really tight.”
Also, “I’m playing with house money.”
That’s one I hear all the time and it just grinds my gears every time I hear
that because they make these analogies to gambling almost subconsciously; they
don’t even realize they’re doing it.
Let’s talk about that “house money” issue.
Is it really house money, or is it money that you worked hard to earn? You pay
for subscription services; you’ve read lots of books; you’ve subscribed to
great trader interview sites. There are lots of tools out there that people can
use to grow their knowledge. You’re paying for that.
Then, of course, the school of hard knocks,
where you do take losses and drawdowns during your trading development and
career.
So, by the time you finally start to see
some consistent profitability, are you really playing with house money, or
money that you earned? Is that money just play money, or is that money you’re
going to pay your bills with, or grow your account with and be able to trade
more size down the road.
It’s not really house money when you have a
successful morning. That really doesn’t allow you to take higher-risk trades in
the afternoon, and I see that phenomenon over and over.
For instance, I see a lot of people say “I
make money in the morning, but I lose money in the afternoon.” As I sit and
talk with those types of students, I often find that they do have a successful
morning, and then their attitude changes. “Well, now I can double up, triple
up, and take a lot more risk because it’s all house money.” They don’t treat it
like their own.
It’s so important for people to understand
that if you’re making money, that is your money and you need to protect it.
I find that the best professional traders,
their mentality is not about how much money they can make on the next trade.
It’s about protecting their money and thinking about how much money they could
lose on the next trade.
So, that’s one key instance right there,
and then the whole concept of risk and risk management. What I find happens
with a lot of traders is that they say “Well, yes, I’m taking a lot of risky
trades and I’m taking a lot of momentum-based trades. I don’t really have a
science behind what I’m doing. I just see the markets shooting real fast in one
direction or the other and I chase after that. But that’s okay because I’m keeping
my stops tight.”
Well then of course what I see is just like
a credit card statement for a person who keeps shopping, the credit card bill
comes and you’ve got to pay the piper and you owe this big drawdown, this big
debt.
Same thing with these traders; no
individual trade is blowing them out, but at the end of the month, it’s death
by 1000 cuts because you’ve still got to pay your commissions and all those
little losses add up to big losses.
What has to happen there is the mindset has
to change. Learn that no, it’s not acceptable just because I’m keeping my stops
tight to take a bunch of high-risk trades.
The focus really has to be how can I
minimize losses from the very beginning, and keeping stops tight may be
perfectly fine, but keeping stops tight on higher-probability trades, and not
just saying “Well, I know this is really risky and that’s my style, but I’m
keeping my stops tight.”
In the end, ask yourself what is that doing
to your trading account month over month, and if you’re seeing continued
draw downs, you need to have a mind shift and focus on higher-probability
set-ups.
And it also seems to me that if you’re
guessing on your trades without having any sort of edge, that again pushes your
trading into the gambling arena.
It pushes you into the gambling arena, and
then you’re clearly not journaling. You probably don’t have a trading plan if
you’re flying by the seat of your pants.
Two fundamental tenets
that every trader should have: a trading plan and they should journal
those trades, especially if they are in the more junior stages of their career,
absolutely.
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