Trading, Gambling, Chance and Iterations

This entry has now been placed in a series we are doing regarding the fact that Trading? IS Gambling. And thus this “guest post” continues from the previous post in the series …

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People love to sit on some high horse and pretend that with superior analytical skills the reality of risk and its nature in all things can be transcended. Yeah, right …

Nobody knows where any market will move next or by what magnitude, nor does any one method of analysis predict it. Period.

EVERYTHING is relative and given that a market is the equivalent of a deck of cards that is constantly being reshuffled. You really need to burn this next sentence into your brain and live by it as it will absolutely define whether or not you become a successful trader over the long haul …

Even if your method’s prediction of what will happen next turned out to be right AS OF the time you got in, it is CHANCE whether or not new info/sentiment/feelings/correlative pressures from other markets, etc. are going to come in and collectively change what ‘happens next’ within the confines of whatever your risk and reward parameters/objectives are.

Because of this simple fact trading or investing of any type in any periodicity in any market is gambling plain and simple. The sooner you approach your trading business as that of a professional gambler, the sooner your trading will improve. In trading (like gambling), the only things you can control are bankroll management, risk management, and bet size.

You cannot control getting a ‘best’ entry price or a ‘best’ exit price or moving a stop to a ‘best’ stop price. There is no way to know the ‘best’ prices for anything. If you happen to get a ‘best’ price, it was just luck like in any casino game.

Survey 100 strangers and ask them what they think about the viability of gambling as a profession. Most will probably only conjour up images of the typical Las Vegas sucker down on his luck and maybe even insinuate that gambling is for losers.

But then ask those same 100 people if they would like to own a casino. How many of them would say no?

Why?

Do they think the casino ISN’T gambling on the outcome of every event just like the player? Of course they are, they have just advantaged the games to be favorable over the long run. Casinos generally don’t let players set their own payout odds. But the capital markets DO, and not using this critical mathematical advantage as part of, if not THE primary building block of your strategy is foolhardy at best.

A professional gambler knows how much he’s going to risk on each event in the series and each session as a whole. He knows when to stop playing, when the probabilities are in his favor, and what his reward to risk advantage will be if he is right. He also knows the outcome of each event/game is NOT in his control. He does not know what the next card turned will be, what the next dice roll will bring, or where the roulette ball will land – nor does he need to know. He doesn’t need to know because he is confident that his risk and bankroll management along with his aggregate individual event outcome probabilities will yield a positive expectation over a STATISTICALLY SIGNIFICANT period of time, but NOT trade by trade manifested one event at a time.

Nuf said…

• This article originally appeared as a post from the DIscovery Trading Group, and is used with permission
  

We continue this entire discussion in the next entry, “Trading is Gambling: You Cannot Predict the Future”