Are you trading or gambling?

8 มี.ค. 2018

Tradingview has opened up a brilliant section on 'Beyond Technical Analysis', where there is much room for development.

I have a very big interest in trading psychology as I've come to realise that success in trading is determined by roughly 80% psychological self-management (and its many components). I've been exploring this topic elsewhere (link later). But for now let's just think about some of this stuff. At the outset I wish to say that I claim no 'guru' status. I do not do trainings or tips. I never - will never - offer anything to others for my personal financial gain.

An exploration of the similarities and differences between trading and gambling is very important. Many a new trader will not realise that they could be gambling instead of trading. I see the two as different, though I am aware that a majority of people may see them as one and the same.

This topic is of the utmost importance. You're in a game where the odds are naturally stacked against you. The markets of any type are chaotic environments that present patterns of various kinds which may be better seen by tools in technical analysis. A new trader could learn the mountain of tricks in technical analysis and still fail miserably. How? Because individual psychology is the big issue. Mark Douglas's book Trading in the Zone is for me the ultimate Bible about Trading Psychology and more. I say no trader should be trading at all if they haven't read it.

How does gambling come into this? Well, the human being is naturally driven by reward. A few big wins in a trading environment is highly rewarding. This can lure new traders especially, into taking more and more (or greater) chances or risks without the structure of a working trading strategy that is tried and tested. This is the same scenario essentially with people who visit casinos. In essence the punter knows in his own mind that doubling his bets and holding out is likely to bring a big win or win back losses. Reality is a different thing, and it is often times painful for those who engage in that sort of activity.

Taking chances or risks is not gambling. Seasoned traders will know that one has to be prepared to lose, in taking a risk or a chance. We all take risks from time to time in crossing a busy street but we are normally aware of what factors we need to control.

Controlling the size of a loss in trading is the very difficult issue that is affected by 'individual psychology'. How do we really know how to control the chance and risk in those scenarios? There are approximately 300 biases that affect the human mind, and another 300 or so logical errors in the mind - the majority of those control our logic quite imperceptibly. The permutations of the latter are extremely large numbers. Add emotional factors to the equation and some will better appreciate how decision-making on risk can be affected. Reward drives emotions and emotions influence thinking (decision-making).

Gambling is an activity which I see as (normally) driven mostly by emotions. For example that hunch that 'you're gonna win' the next time around. There are so-called 'expert gamblers' who make millions at casinos. These are exceptional people - but they weren't born that way. When you look at what they do, they aren't gambling even when they are in the casino (a place that is defined for gambling). They have a system, a process, they avoid emotional influences and they are highly controlled in their responses. Many of them are not even concerned with winning or their losses. This is much the same sort of mindset I pick up from a few truly successful traders. This is what true traders must achieve to avoid gambling.

Supplemental: What is gambling? - Managers of chaos - Luck & chance