Trade – don’t Gamble

Don’t treat trading and investing as gambling! How to avoid the common traps that lead to heavy losses.

“It’s payback time!” or “let’s recoup the loss”. These are very common thought processes or phrases that you could hear from traders, that started to treat their trading as gambling. Many great traders have fallen into this common trap. Have you started treating trading as gambling? There are some red flags and tell-tale signs that indicate if you are falling into the same trap. You are not a bad person or a bad trader per se, but have fallen victim to some faulty thinking. Even institutional traders, with hundreds of millions under their belt, occasionally fall for this trap. Let’s see how to avoid this trap and stop treating investing as gambling.

Traders usually start with a trading strategy. A good trading strategy includes a clear idea about entry and exit rules, money management and stop loss and take profit levels. A very good trading strategy includes a disaster plan! What happens if the connection to the internet is lost? What will you do, if there is a sudden price spike? How will you react to any sudden change in price movement or unforeseen events? How will you deal with these things in terms of emotions, thinking and financial planning? If you have a solid and sound trading strategy, then all these questions will be answered beforehand and you will not deal with them during the course of a trade. This is similar to a pilot flying an airplane. During the training procedures, pilots spend more time learning disaster recovery methods than actually flying an airplane. The best strategy to survive a disaster is to prepare for a disaster.

This is one of the earliest red flags! If there is no contingency plan in your trading or any trading plan at all, then you might be set to treat trading as gambling. Interestingly enough, there are similarities between some gambling strategies and trading strategies, but here we are talking about “playing the market” by pure luck and just “hitting the button” or allowing your emotions to go wild and trade by an purely emotive reaction, instead of a cool and calculating scheme. Emotions will fog your rational thinking. Trading and Gambling are numbers games and both require actual logical and rational thinking. Just running the numbers and following a statistically sound strategy, that hopefully has the odds on your side.

If you are sitting in front of the computer and trying to “get revenge” on the market and letting your ego do the bid, than you are treating trading as gambling and not as investing or financial planning. Some investors buy stocks or commodities to hold for a longer period of time. This is clearly called investing. The results have in the long run a positive expectancy. If you are blindly putting your money on any price movement, without knowing why you are entering the trade or trusting your “gut feeling”, than you are most likely treating this as a trip to the Casino. The only difference is, that at the Casino at least you get some free drinks.

Treating trading as a business

A business owner takes care of his business by logging expenses, costs and closely observing profits and results. He is careful with expenditures and closely monitors his business activities. This means, you should do the same.

Start a trading journal, even if the broker is already tracking all your trades. A trading journal will help you, to compare your trading plan with your actual execution of the plan. There is an old adage among old school traders: “Plan the trade and trade the plan!” This is good advice and you should heed it. Hope is not a plan. Gamblers put their chips on a colour and “hope for the best” or “hope to win”. A good trading strategy has to have a positive outcome, even if it is after a long series of trades. There are times where you lose and times where you win, but in overall you should be able to end in profit. This is called a positive expectancy. The odds in a casino are heavily in favour of the house and the player goes home empty-handed (with lots of free drinks). This is not the case with trading. There are trends, financial tendencies and strategies. You should have a good financial and/or trading educations and know what you are doing.

SmoothTrading has the mission to educate and inform all traders about these things. We aim to provide ideas about trading strategies, good trend-following methods and help for day traders. In future articles we will discuss trades with a definite positive expectancy and also discuss how to mathematically calculate good risk-to-reward ratios and how to measure your success. You are here to trade and invest your hard-earned money and not to put it all on a “spinning wheel”. Education is very important in this business and following financial news is important too. We will give you hints and clues about current financial news and political events, which could influence the outcome of your trading strategy. Stay tuned to more articles about this topic.

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