You know, there’s a fine line between trading and gambling.
One way has you flying by the seat of your pants. The other has you operating with cool calculated professionalism.
But to all intents and purposes the exact same actions are taken either way.
So how on earth do you separate true trading from gambling?
It’s easier said than done.
In fact, many traders who think they’re trading are gambling. Or should that be they’re gamblers who think they’re trading?
See! We’re getting tied up in knots already.
Luckily there are 5 easy-to-spot signs that tell a trader he’s veered over to the dark side.
But they’re only easy to spot once you know what they are.
5 signs you’re gambling instead of trading (and what to do about it):
1) Not trading with a proven strategy. Without a sound strategy you really are stabbing in the dark. The right to trade intuitively – where you place trades based on gut feel – needs to be earned. You need to put serious screen-time in before you start getting a subconscious feel for market activity.
Solution: Stop trading and get yourself a proven strategy that delivers long-term positive expectancy! Design one yourself of pick up a copy of a tested and proven commercially available strategy to cut your teeth on (look for one that has a record of actual results so you know it works).
2) Trading without a plan telling you exactly what to do, when. The trading plan tells you how, when, and where to deploy your strategy. You should be left in no doubt what you need to do when (it should even tell you when you should stay clear of the markets – staying flat is a perfectly legitimate position of its own).
Solution: Get your trading plan down on paper and keep it where you can see it as you trade (good commercial strategies provide you with a plan to trade by). Remember the army maxim – Prior Planning Prevents Poor Performance
3) No risk management measures in place. Do you have a method of measuring how much to risk on each trade? It can be as simple as breaking down your account into 1% ‘Units’ and risking a single unit on each trade. The location of the stop loss order will let you calculate how many units to risk (and may even keep you out of volatile markets completely – the risk may be too great for your account size on certain trades).
Solution: No risk management in place? Read Trade Your Way to Financial Freedom (Van Tharp) immediately.
4) Revenge trading or trying to jump on breakout moves in the heat of the moment. We’re moving into real gunslinger territory now. I know it can be incredibly hard to watch the market take out your stop loss only to reverse and head back in the ‘right’ direction. So temping to bang a quick order in to show the market you were right in the first place and even the scores. Or equally as bad – trying to jump on a breakout move just because you notice momentum in the market. It’s fine if it’s part of your plan but a ticking time bomb if you’re winging it.
Solution: Try moving out to a longer trading time frame. Instead of day trading or scalping by the minute, move out to hourly or daily charts. It can slow you down and make you give full consideration to your decisions before you pull the trigger.
5) Emotions begin to dictate your ability to place trades. If you’re not taking all the trades your plan says you should you are gambling. You might feel like you’re playing it safe by dodging the odd trade that ‘looked bad’. But by doing so you’re riding rough-shod over the probability and expectancy of your strategy. Missing out trades can be just as bad as firing off orders willy-nilly. It does require a bit of mental toughness but this truly is the essence of success in the markets.
Solution: Stop trading, scale back the money you’re risking by using a mini-account, micro-account or even a demo account. Go back to a level at which you can make decisions clearly with no emotional attachment to monetary loss. Test the water tentatively as you go bigger again, it may be something you need to work through in stages.
So do a quick ‘gambler V’s trader’ audit using the 5 points above before you place your next trade.
And take corrective action if you do find anything amiss.
Make sure to keep the odds of success on your side!