Trading - A Gambler's Game?
Remember your first trip to a casino?
I do and I remember my experience very well. It was in 2000 in a plush casino in Tunisia. From the grandeur inside it would not go amiss amongst the palace like casinos in Las Vegas. The buzz being created from the different noises produced by the various tables and machines the casino had been kitted out with plus the joy and screams of the revellers inside was simply electric. The moment I walked in, I was taken away by this human tsunami of gambling energy and excitement.
I was not much of a gambling man myself so I stuck to what I knew which was BlackJack. I won some hands and lost some hands and I walked away with pretty much the same amount of money in my pocket. However, what I remember most is walking around in awe of those at the poker tables especially those with the mountain-sized stack of chips next to them. It just seemed so cool and captivating. I did not have a clue about the rules of poker so the first thing I did when I got home was to read up about them.
Poker is a very interesting game where the psychology, strategy and risk management has similarities to trading. Now let's be clear here. I am not talking about the amateur poker player who has the odd flutter now and then. I am talking about the professional poker player who has learnt to make a living from it. One who has perfected his technique and is able to gain substantial and life changing monetary gains from it. One who has turned it around from being a game of chance to being a game of odds and high probability setups.
So how does the strategy of a trend trader mirror that of a poker player?
A private trend trader only enters trades where price has a high probability of going on to reach a predetermined target. This high probability is called "an edge" and is determined through a number of rules that have to be met through technical analysis. An edge, in gambling, is defined as a systematic advantage a player has over his opponent. By using this edge, a private trend trader aims to catch large movements over time, as much as several thousand pips, but with minimal time spent in the market.
In poker, a professional will only risk his chips when he feels that his set of cards plus those on the table have a higher probability, hence an edge, of taking the pot then his opponents do.
How does the psychology of a trend trader mirror that of a poker player?
A private trend trader understands that serious monetary gains are made by trading with that edge over a long-term basis. He understands that over the course of many trades, he will probably have more losers than winners but the winners, leveraged by compounding, not only cover the losses but bring home the life changing money that most people set out to achieve but very few do. The traders who have mastered this total an unbelievable 5% and are called the Smart Money.
Key to this psychological approach to trading is that it allows the emotional element to be removed, namely hope, fear and greed. It is this consistent, mechanical, stress free approach that not only brings the huge monetary gains that a trader wants but the stress free lifestyle that comes with it. By trading using the daily and weekly chart, minimal time is spent in the markets, maximum results are yielded and the one thing we require most of all - our time - can be spent exactly how we choose to. After all, who wants to spend all day staring at a screen?
A professional poker player has the same psychological approach where he chooses to only bet on the high probability cards - the edge - that appear over a number of hands. He simply folds on the cards that are not. It is this discipline and consistency that not only makes a great poker player stand out from the rest but removes the emotional element when sitting at the table. Emotions will of course affect his approach and game strategy.
Where the lifestyle of a professional poker player matches that of a professional trader is that he only plays a handful of tournaments a year but unlike a trader probably has a jet set lifestyle playing in tournaments and casinos around the world. He luckily also has that "wow, that's cool" factor that does not really come with trading. A top Smart Money trader, though, can afford to have the jet set lifestyle from his massive earnings from trading.
Risk small WIN BIG? Possible?
It is the final element that determines not if but when a trader is looking at an empty trading account and a poker player left empty-handed with all his chips taken by the smarter players at the table. This is called risk management.
Scalping is where a trader looks for a handful of pips, say 5 to 30 pips, in a matter of seconds or at best several minutes. He over hedges his risk looking for large gains in a short period of time. The entry of the trade is probably based on some technicals but it is the volatility of the market that makes this not only a highly risky way of trading but also a highly emotional way of trading. A losing trade would result in a serious chunk of the scalpers account lost to the market. A scalper may not even use a stop and if the market goes completely against him then he really is in trouble.
As a consequence, emotions such as anger and greed would kick in causing the trader to scalp again but this time at an even higher risk hoping to claw back some of the money already lost. It is this style of trading that not only empties out most traders accounts but is also emotionally draining on the scalper. It is little understood the fact that it is actually human emotions that move the market but in return the market shows no sympathy for emotional traders.
A poker player who has a similar risk management style where he bets large on low probability trades usually ends up with a similar result, that is out the game early. He "bluffs" his opponents into thinking he holds strong and to squeeze others out the pot. If they call he then needs to fire again and even larger until he is bust.
In trend trading, a private Smart Money trader risks a tiny percentage (typically 0.5% to 2%), of his account per trade and strategically compounds as the trend develops. It is through not over trading and by catching a few good trends a year that the Smart Money private trend trader makes his money. It takes time to reap the rewards but gains are exponential. (2% on £100 000 is far bigger than 2% on £10 000.) The Smart Money private trend trader understands this and is in it for the long-term. He knows that any single moment in the market is random but over time the market repeats itself.
Having appropriate risk management ensures losses are minimal but gains are huge through having several positions running side-by-side, in other words compounding, on these large trend moves that repeat themselves. The emotional element is totally removed as time spent in front of the screen is at a minimum and risk management is also flawless with stops in play and a clear understanding of how much is at risk. Trades are checked maybe twice a day, once at the start of the day and once again in the evening. The rest of the day is free to be spent as the Smart Money private trader chooses.
A professional poker player has a similar strategy, betting small on high probability setups over a large number of hands and compounding as the game develops. This ensures he stays in the game for longer, giving him a much better chance of taking the jack pot. It's basic bankroll management. Do not put all your savings on one £50 000 tournament. Even a winning player will get unlucky once. You need to spread that money over say 500 tournaments at £100 and then the skillful player will win out in the end.
Why choose trend trading as a lifestyle?
Trading has to be kept in perspective and so does money. Money should not govern us but instead be a tool for us to be able to achieve the desires of our mind. The more we have, the better the lifestyle.
It is through long-term trend trading that a private trader is able to reap both substantial and life changing monetary gains and also a stress-free time-free lifestyle. This does not happen overnight but after an initial period of education and then through consistent Smart Money trading, the rewards are well worth the wait.
Chasing this success through scalping and gambling guarantees a hair-raising, negatively charged emotional roller-coaster of a ride which will ultimately lead to an empty trading account and a totally burnt out trader. Many who choose this route end up believing that trading is gambling and that a living can not be made from it unless you have some secret formula or have links to the inside where you are one step ahead of the market or are some kind of financial guru.
Those of us at The Traders' Cosmos know the truth.
I will leave it to you to decide on what trading style suits you most and what lifestyle choice is the most appealing.
Trading does not have to be complicated. In fact the most successful strategies are the ones that are kept simple and here is the proof. In less than 30 minutes you will learn how to apply Bouncer, a simply yet highly effective trend trading strategy that is also used by our Trading Room members and that can be applied to any financial market. It can also be set up on any software available on the market.
