Some consider gambling and trading to be similar activities as they see both as a game of chance, which is largely dependent on luck. Do you think that this is true and is the public’s stereotype of traders as “career gamblers” well founded?
This short article explores the core fundamental psychological differences between traders and gamblers and attempts to debunk the public perceived view of professional traders in the financial markets.
The case study is presented as a parable depicting the fate of 2 persons, a gambler and a professional trader, their psychological states, and eventual fates. Establishing the differences between the two clearly widens the chasm between both realms to such a degree that it’s no longer a thin line… It’s a distinction.
I love to trade. An innocuous enough statement, but nevertheless euphemistic way of saying “I love to gamble”. Despite having been to the grandiose Marina Bay Sands a couple dozen times or more, never had I so much laid a single bet down at their punting tables. I had, and still have, absolutely zero interest in games like baccarat, roulette, craps, or any other games of chance (I’m looking at you, slot machines). You’ll find me heaving sighs of disappointment looking at the otherwise exhilarated masses crowding around the cavernous Sands gambling halls. Not that I have anything against the Sands corporation, but I do have everything against gambling – ever since it costed the life of a dear uncle. But deep down, if I am being truthful with myself, I’ve got to admit that whenever I traded a lot, I’d be just as much of a sucker as every hopeless bum relinquishing hard earned cash to the likes of Sheldon Adelson or Steve Wynn.
If you are trading just for the sake of it, just for the thrill of being “in the game”, just for the temporal adrenaline because you managed to “beat the market”, then make no mistake because you are gambling. You are trading without any edge, information, consistency, finesse. You are at a precarious position, walking the tightrope, waiting for the next capricious price movement to take you out.
Towards the end of last year, I decided to heed Nenad’s advice and do something about this toxic addiction. I created two accounts – A main “career trading” account, for trades that follow our trading strategy (ECS methods), and the other for “adrenaline trading” basically for all my trigger-happy whims and gambling impulses. I learnt that the key distinction between a trade and a gamble is information. The less information we have, the more likely our trade is a gamble. In fact, ECS systems are robust and consistent simply because they are designed to convey maximum information over minimal clutter. Simple trading solutions. Who knew?
A technical trader who uses the ticker-tape to gauge support and resistance is just another gambler chasing the market. On the contrary, a trader who patiently observes multiple time frames to identify key support and resistance, is aware of Fibonacci levels, and only pulls the trigger when price conforms to the criterion of his analysis has a more consistent, sizable success rate. Similarly, a fundamental trader mindlessly reacting to the latest economic data or news release without understanding market expectations, current price flows, and mitigating factors is also another gambler.
Like all things in life, to succeed in trading requires hard work and homework. There is no holy grail, no magic gimmick. In the business of trading, working hard does not guarantee that you’ll win, but not working hard sure as hell assures that you’ll lose. We have to acknowledge that trading, at its core, is a game of information. In a market where the only constant is change and we must always be up to date with the latest happenings in the market, or risk being the sucker at the gambling table.
Image of ecs.SWAT in action.
My “career trading” account was only traded with ecs.CAMMACD and ecs.SWAT methods with strict, rules-based entries and exit and religious adherence to money management. Though I traded less frequently on this account, the trades were made with more finesse. In that controlled environment, my trades had more trackability, more consistency. The lax trading frequency also meant that the strategy as a whole would be more sustainable in the long-term. Through this approach, I braved the maelstrom of the November-December risk-off spate relatively unscathed due to low drawdowns and ended up profitable as both strategies hedged effectively against each other.
Meanwhile, I was trading my “adrenaline” account like trigger-happy Nick Leeson in his rogue trader days. My equity erratically spiked up and down with every consecutive martingale. The thrill of being “in the game” quickly transpired into an emotional rollercoaster as I experienced all spectrums of ecstasy, to relief, to trepidation as the ticker-tape mercilessly ticks on. That did it for me. I was no longer drawn to making impulsive trades. My trigger-happy impulses has died down drastically. The “adrenaline trading” account eventually became a test account where I devote my time in backtesting and reengineering my own iteration of the various systems and EAs you see on this site.
Take it from an addict. The less you gamble, the more you realize how stupid it is.