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.”
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 increase my trade size as I am already in profit and today is my day, so traders take high risk bet and lose out eventually.”
It’s so important for people to understand that if you’re making money, 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.
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 drawdowns, 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.
Superb article, Bramesh !!