Why am I trading? This is not a trivial question to ask; and you must answer it honestly. Are you trading to make money? Or are you trading for the thrill? In other words, are you trading like an investor or like a gambler?
- What are my trading goals? Again, not a trivial question. Are you trying to gain a few dollars for extra spending money? Trying to fund your retirement? Trade for a living? Or are you trying to amass a fortune and retire early to a life of luxury? How you answer this question will identify the level of risk that you will have to endure.
- What is the size of my trading account? An obvious question.
- What is my skill level? Be honest.
- What is my tolerance for risk? And does that tolerance bear any relation to my skill level? It’s no good having a high tolerance for risk if your skills are inadequate.
- What must I do to improve my skill level?
- If my skill level is low, what trading size can I use to ensure that a single bad decision will not wipe me out? Preserving capital and staying in the game long enough to LTP good trading practices is crucial.
- What is my preferred trading instrument and have I familiarized myself with the behavior, range and velocity of that instrument? Some trades, like bonds and the ETF’s can move at a glacial pace.
- What indicators will I use to identify my entries and exits? Here, “the more, the merrier” may not be the wisest choice. Remember, there can be paralysis by (over)analysis.
- Where will I place my initial stop; and how will I manage them? You may have a trailing stop strategy, or you may plan to just exit when your indicators say, “Get out!”
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Archives of “gambler” tag
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Why am I trading? This is not a trivial question to ask; and you must answer it honestly. Are you trading to make money? Or are you trading for the thrill? In other words, are you trading like an investor or like a gambler?Discipline-Risk Managment-Passion for Traders
- DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
- RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
- PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.
Poker and Trading…Some Rules Applicable to Both.
Pay Attention…and It Will Pay You. Concentrate on everything when you are playing/trading. Watch and listen; remember to do both and relate the two.
Understand When to Play Aggressively…It’s the Winning Way. Don’t be a tight or a loose player/trader; be a solid one and recognize when it is time to press your bets/positions. To attain superior returns in poker and investing over the long run, grind it out (in stocks until you are up 30%-40%, and then if you have convictions, go for a 100% year). If you can avoid losing and put together a few 100% years, you can achieve outstanding long-term investment performance.
Tells: Look For Them and You Will Find Them. Poker players and stock markets have tells — giveaway moves that are very revealing. Learn to recognize them. History is your textbook.
ESP…It’s a Jellyroll. In those rare instances when all your card knowledge and market judgment/knowledge leaves you in doubt, go with your strong feelings and not against it.
Honor: A Gambler/Trader’s Ace-in-the-Hole. A good reputation and respect from others will put you in good stead.
Be as Competitive as You Can Be. Go into a poker game and into a trade with the idea of completely destroying your opponent or scoring a major investment coup. If you win a pot or make a successful trade, nearly always play the next pot or make the next trade shortly thereafter — within reason. Although the cards and trades might break even in the long run, rushes do happen and momentum often feeds upon itself. When you earn the right to be aggressive, you should be aggressive. When one has a tremendous conviction in a poker hand or trade, you have to go for the jugular.
Art and Science…It takes Both. Both activities are more art than science — that’s why they are so difficult to master. Knowing what to do is about 10% of the game. Knowing how to do it is the other 90%.
Money Management. The same sound principles of money control apply to the business of tournament/professional poker and to successful investing. The way to build long-term returns or poker winnings is through preservation of capital and home runs.
The Important Twins of Poker/Investing, Patience and Staying Power. Come to the poker table or to the markets with enough time to stay and play for a while.
Alertness is a Key. You must stay alert at all times.
So is Discipline.
Never Let Your Mind Dwell on Personal Problems. Never play/trade when you are upset. Make a conscious and constant effort to discover any leaks in your play, and then eliminate them.
Control Your Emotions. Allowing your confidence to be shaken can turn a simple losing streak into a terrible case of going bad. Keep your emotions in check. When you lose a pot or make a poor investment decision, get up, walk around the chair or take some deep breaths. Don’t lose your poise. If a trade or poker hand does not work out, walk away from the position/hand. Be confident enough about your ability to win afterwards.
When does trading become gambling?
There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line.
1. IF you enter trades without a clear trading plan, you just might be a gambler.
2. IF you trade just to be trading, you just might be a gambler.
3. IF your bored and enter a trade, you just might be a gambler.
4. IF you look at potential profit before assessing potential loses, you just might be a gambler.
5. IF you have no impulse control, you just might be a gambler.
6. IF you have no methodology, you just might be a gambler.
7. IF you rely on others for your trading decisions, you just might be a gambler.
8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.
9. IF you increase your risk due to losses, you just might be a gambler.
10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.
And my all time favorite
11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.
12 Cognitive Biases that Prevent you From Being Rational
Confirmation Bias – The tendency for people to favor information that confirms their beliefs or ideas. Investors and economists often fail to fully appreciate other views due to a narrow minded view of the world often resulting from what they think they already know.
Ingroup bias – the tendency to favor one’s own group. In investing and economics we see this in ideologies and particular strategies. Austrians favor those who believe their own thinking. Chartists dislike value investors. Often times, the strongest economists and investors are the ones who are able to move beyond this ingroup bias and explore the potential that other groups have something positive to contribute.
Gambler’s Fallacy – When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. We see this in trading all the time. This is the belief that just because something has occurred in the past that it is more likely to occur in the future. The “trend is your friend” and that sort of thing….
Post-Purchase Rationalization – When one rationalizes past purchases after the fact in an attempt to justify past actions. Investors often learn about how a bad trade turns into an investment when they rationalize their past purchases. If you’ve been in the business for a while you know how destructive this can be. (more…)
Max Gunther set forth basic trading principles called The Zurich Axioms
On Risk:
– Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
– Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
– Resist the allure of diversification.
On Greed:
– Always take your profit too soon.
– Decide in advance what gain you want from a venture, and when you get it, get out.
On Hope:
– When the ship starts sinking, don’t pray. Jump.
– Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
On Forecasts:
– Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
On Patterns:
– Chaos is not dangerous until it starts to look orderly. (more…)
You Are Having Trading Skill or You are Lucky ?
Traders with skill have large gains after 100 trades and are relatively quiet, traders that were lucky have huge gains after a few trades and are very loud, then very quiet for the next few trades that usually bring their account to zero.
Traders with skill risk 1% to 2% of their trading capital per trade and win in the long term, traders that are just lucky risk the majority of their account for a few big wins in the short term but lose in the long term when their luck runs out.
Traders with skill use a successful method with many stocks in different markets, traders with just luck are only successful with one stock and when its up trend ends their winning streak ends.
Traders with skill have winning track records over many years, traders with only luck only have winning track records measured in months.
Traders with skill have risk management as a top priority, traders with only luck do not understand why risk management is important, yet.
Traders with skill are trading like it is a business, traders operating with luck are trading like they are a gambler in a casino.
Traders with skill use a trading plan and back tested method, traders with luck make guesses and are sometimes right.
Traders with skill have done their homework, traders with luck think they are naturally smarter than the market.
Traders with skill are disciplined and stick to their system, traders with luck make bets based on opinions.
Would you rather be lucky for a few trades or skillful for a few years? Lucky traders give back their profits when their luck runs out. Skillful traders are eventually financially interdependent due to their long term capital growth.
Always Remember
One must always remember Slansky’s admonition which is that you have to take account of whether you’re a winner or loser, and what your average rate of win is relative to the distribution of losses. If you’re a good player, never accept a bet with a small edge if it might subject you too close to gambler’s ruin, or getting stopped out of you position even if you have an edge. Many a good player doesn’t call bets in one’s favor if it has too high a variability relative to his bank roll. Many a t-grade should not be taken when the variables like an announcement put the normal tit and tat into jeopardy. I hate to force a weaker player, (assuming I might ever have that luxury again) into making a good shot. Board players are the same way. They can sometimes create a crisis, a tension where if the weaker player makes the rite move, he might pull out a draw or victory. Much better to grind the poor sinner or market into oblivion.
Be Unemotional
If you have ever played poker, you will know the high of going “all in”. Your heart is racing like there’s no tomorrow, and you are hoping and praying that the cards will go your way. It’s the thrill of knowing you can double your money in a few moments and also knowing it can all disappear if things don’t go your way.
This type of excitement should not exist in any form in your trading. If you are a thrill seeker, go skydiving. If you are a gambler, go to a casino. If you are afraid to lose money, open a savings account.
Successful Day traders do not let their emotions interfere with their trading. Too often, we let fear, greed, or pride get in the way.
Fear
Fear will prevent you from making the right trades and make you lose out on immense opportunities. Fear stems from lack of knowledge and proper education. You are afraid because you can’t see that a trade is the right trade since you don’t know what the right trade looks like. Once you acquire the knowledge and training, you can begin to trust your decisions because they are based on facts and not emotion.
Greed
Greed is another emotion we must overcome to be successful. Many beginners experience “beginners luck”, and come out on top on their first few trades. Then they start believing that they should have traded with more money so their profits will be larger. So on the next trade, they trade with a large sum of money and they lose it all. Logic will dictate that they should trade with a smaller amount the next time around since they have less capital now. Unfortunately, humans are not logical creatures. Our greed takes over, and we start believing that if we put in more money, we will make up for the lost amount, and come out on top. Sadly, this cycle can only continue until you are completely out of money. The worst thing that can happen to a beginner trader is to have a successful first trade. (more…)
Gambler’s fallacy
For a fair coin, the answer sho uld be that both outcomes are equally lik ely.
If you Believed that the next flip is more likely to be tails because “tails is due to come up” this is whats is known as gambler’s fallacy, a great example of availability bias. i.e ” availability bias occurs when our estimates of probabilities are influenced by what is most “available” .
The purpose of the quiz is simple .
As traders assess new information, all observations must be appropriately weighted in prices or estimates of probabilities. If traders are unduly influenced by availability bias, the resulting estimates may not be accurate. You must at all time in your approach be equally fair, balanced objective and dispassionate while gathering your analysis toward trading .
