Psychology of Trading
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When trading turns into gambling?

When trading turns into gambling?

created Natalia Bojko11 February 2019

Reading the stories of great speculators, in addition to large amounts of money, we can also find unimaginable losses, which often led to bankruptcy. All the time they felt that all this was just a game, temporary happiness and pure randomness of events.

Gambling or investing?

In our (and not only) society, stereotypes are an integral part of the assessment of the environment. The words of the stock exchange, trader or currency market in advance are reduced to synonyms related to gambling. Where is the border between these two worlds really real?

The starting point for further search for the answer to this question is the definition of gambling itself. What is it actually? In quite generalizing and simplifying it is usually a game or a plant that involves the risk of losing money. There are two key words here - risk and loss that are not alien to any trader. Is there a difference between a poker game and opening positions on the currency pair? There is one major difference that effectively implemented in trade works in our favor. I'm talking about probability. It is this factor (in combination with knowledge and experience) that largely sets the boundary between retail investors and employees such as large hedge funds. While most retail investors lose their money, they are able to profitably grow profitably. They earn money by working out the principles of their strategy and, above all, by taking a position when the probability works in their favor. At this stage, the question arises again: do not we rely on probability during gambling?

The answer is clear. Gambling is also based on probability. Our ability to manipulate it depends on the type of game. Others appear at poker, others at roulette, and others at the ordinary dice. An unequivocal answer to the question of when trading changes into gambling seems difficult in this light. In both, there is a risk factor, loss and making more or less rational decisions based on probabilities. It all depends on how we treat trade. You can distinguish three basic issues to help distinguish which side we are on.

Be sure to read: Steve Ward - interview with the star of the FxCuffs 2018 conference


gambling investingThe action plan is a fundamental issue that distinguishes professional traders or poker players from gamblers. Each speculator is aware of how hard it is to keep a steady profit from their positions. The lack of a clearly defined strategy is tantamount to relying on luck. The ability to determine the level at which we are able to withdraw and close quickly a lossy position requires enormous discipline towards oneself. Even before entering the market, one should determine where we place ourselves with the proverbial stop, whether in the form of an order or a closure of the hand. Enlargement of a potential loss, by entering new positions, trying to average the price, with less and less favorable signals is also an element of the lack of an action plan. In this light, the ability to not only discipline oneself, by determining the maximum loss, but also letting go of trade, when the market, for example, is characterized by low volatility, seems to be invaluable.

Risk management

Without going too far into the ways of risk management, a great indicator in assessing whether we are changing into a forex gambler is the position we have made. The "all-in-all" casino has nothing to rationally create a profit / loss ratio on the market. Just like too big positions in relation to the invested capital. Taking a risk-disproportionate risk can succeed and several times. Sooner or later, statistics work against us.

See: How to manage capital on the Forex market

What money do you invest?

capital managementYou have probably heard about people who were able to sacrifice all their assets (not to mention family relations and loans) to try their last relics. In the light of these facts, a wise trader will turn the capital that he can lose. Therefore, I doubt that it will be money intended for a "rainy day" or savings of all life.

On Forex, our leverage is our biggest friend and at the same time the enemy. Skillfully used, it optimizes capital allowing for higher earnings. The use of this mechanism allows you to earn on small fluctuations in the exchange rate. Improper leads to spillover. Overleveraged is not without a reason called the most dangerous tool on the Forex market. Usually, such a contract absorbs all the investor's money. What happens if the market does not go in the direction it has set? I do not have to explain.

You decide about it

Whether trading can be considered a gamble, whether or not a rational way of earning money depends entirely on our approach. The boundary between one and the other is relatively thin. Without disciplining one's beliefs, the ability to make a free or ordinary reconciliation with a loss in understanding the risk taken, we can treat the market as a virtual casino.

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About the Author
Natalia Bojko
Graduate of the Faculty of Economics and Finance, University of Białystok. He has been actively trading on the currency and stock markets since 2016. It assumes that the simplest analyzes bring the best results. Supporter of swing trading. When selecting companies for the portfolio, he is guided by the idea of ​​investing in value. Since 2019, he has held the title of financial analyst. Currently, he is the co-CEO & Founder in the Czech proptrading company SpiceProp. Co-creator of the Podlasie Stock Exchange Academy project (XNUMXrd and XNUMXth edition).