Today we welcome Les Schwartz of DecisionBar Trading Software to the Trader's Blog. Les shares his thoughts on why many gamblers become traders and how those types of traders can shift their trading psychology to make more profitable moves in the market place.
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Having been an active trader for 20-plus years, I’ve had the opportunity to observe much more than your average investor.
For instance, one of the unusual things I’ve observed is that many traders come from a gambling background, and horse betting in particular. In fact, many years ago I worked at a race track and placed a few bets myself.
Why do horse betters frequently gravitate toward trading?
I think it’s because there are certain aspects of trading that are more predictable than horse betting. A stock or an option or a currency pair can’t break a leg or unexpectedly fall ill.
Plus, very few guys who play the horses make a full-time living at it. But there are many, many traders who enjoy a healthy part-time income – or even make a full-time living – from trading.
I believe this is because the odds of winning as a trader are far better than the odds of winning as a horse better.
Unfortunately, many ex-gamblers hold onto bad thinking patterns, what I call “the gambler’s mindset.” It’s the mindset that you can roll the dice, or buy a lottery ticket, or pick a trifecta and suddenly win a fortune.
This kind of get-rich-quick thinking is hard to shake, and it keeps many traders from reaching their full potential.
The Danger of Gambling Psychology in Trading
If you trade like a gambler, you’re bound to lose money. You’ll make bad trades. You’ll throw good money after bad. And eventually, you’ll find yourself wondering where all your money went.
(Hint: Wall Street took you for a ride!)
Fortunately, there are a few simple mindset shifts that can turn your trading around, sometimes overnight.
Mindset Shift #1: Don’t Chase Trades; Let Them Come to You
Gambling produces some strange responses in people. If a gambler wins once, he’s likely to keep gambling until he wins again… even if he loses a small fortune along the way. And if he loses, he’s likely to keep gambling in an effort to “win back” what he lost – even if he continues losing.
These behaviors are not unique to gamblers; traders are guilty of doing the same exact things. If we win a trade, we try to force another winning trade – even if the second trade is doomed. And if we lose a trade, we try to quickly make back what we lost on the next trade.
This irrational behavior is caused in large part by our cultural conditioning. All of us are hard-wired to work 40 hours a week. If we work any less, we somehow feel that we don’t deserve the money we’re making. We believe we must “work hard” to earn a living.
This belief often carries over into trading, and so we “work hard at trading.” We enter trades even when there aren’t any good trades available. We trade for trading’s sake. Then, when our poorly placed trades move against us, that gambler’s fear of loss kicks in… and we begin making even more foolish decisions, which compounds our losses.
It doesn’t take a genius to see where this behavior will lead. So here’s a suggestion: Once you understand what makes a good trade versus a bad trade, let the good trades come to you.
One of the best ways to do this is to monitor just a handful of stocks, options, or currency pairs and become familiar with them. Over time, you’ll understand the price movements better, and you’ll be able to spot good trades more easily.
You don’t have to trade every day or even every week to make a very good living as a trader. You only have to make a few good trades when the opportunities present themselves. In trading, patience is most definitely a virtue.
Mindset Shift #2: Adopt a “Win Small” Approach to Trading
Gamblers-turned-traders are often looking to “hit the jackpot.” They want to place one trade and be set for life.
But it doesn’t work this way. It often takes scores of trades, even hundreds, to really build the kind of fortune your neighbors would envy.
With that in mind, it’s much better to aim for small consistent wins. Small consistent wins are much more realistic. And compounded over time, small wins can add up to truly staggering numbers.
The best part is this: While you are focusing on small consistent wins, you’ll be sure to experience some big wins as well, a natural byproduct of your “win small” strategy.
Mindset Shift #3: You Don’t Have to Win Every Trade
The last mindset shift – and possibly the most difficult of all – is to understand that you don’t have to win every trade to make good money as a trader. In fact, losses should be expected and planned for.
The best fund managers, the best traders, and the best trading software all have this in common: Sometimes they lose money.
Ultimately, it’s how you react to losing money that dictates whether you’ll succeed over the long haul. Do you stick to your stops? Do you follow your money management rules?
You see, it’s not how you do on a single trade that counts. It’s how well you do over a series of trades. If you win 6 or 7 trades out of every 10, you could be doing quite well.
What’s more, if you do a good job of limiting losses (a function of a solid exit strategy), then you may even be able to come out ahead if you only win half the time (five winning trades, five losing trades).
However, I understand that emotions can still run rampant in spite of your best efforts to control them. So after getting out of a losing trade, you might want to take a break for a day or two so you don’t make any more bad trades during the depths of disappointment.
Change Your Mindset, Change Your Trading Account
The truth is, you trading account reflects what’s going on in the gray matter between your ears. So the next time you start wondering why you’ve been on a losing streak, or why your trading account is shrinking, take a moment to self-reflect.
Then remind yourself to:
Wait for good trades
Aim for small consistent wins
Be okay with losing trades (so long as you limit your losses)
These small “mindset shifts” will help prevent you from trading like a gambler and trading like a real business person instead. Not to mention it will help you grow your trading account consistently over time.
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About the Author: Les Schwartz is a 20-year trading veteran and the creator of DecisionBar Trading Software. DecisionBar uses proprietary algorithms to zero in on perfect trading opportunities in real time and remove the guesswork involved in picking winning trades. Click here to learn more about DecisionBar Trading Software.
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Adam, are you suggesting we will begin going down down down to 500 on s&P in this correction. You just might be right in this strong uptrend.
Please remember there is a HUGE difference between being a trader and an investor. A trader may be in and out of the market in minutes, days, weeks, or months. An investor may make a few trades occasionally, but usually has a buy and hold style. A gambler is more like a day trader -- in an out in a short time. No matter what your style, money management without emotion is crucial to the bottom line. Gambling is high risk investing. Trading is high risk investing. Being smart about it is how you make your money.
a very nice lesson,I think every beginner should read it, if he/she really wants to trade and make fortune in long term. The mental psychology is more important. there must be some logic behinde every trade as gambeler don't have or even if he is having needs a high probability study must be motivated by his luck factor. with my experience considering psychology trading that is what comes most of the time while trading is that, a direct money involment is there, suppose you bought 5 kg of apple from fruite market and you lost some where in between from market to your home way,definetly you will be depressed but not as much as if you lost currency of two dollar from your pocket while returning back to home. isn't it ?
Excellent article!
Trading VS Gambling
Gambling is for a Gambler, trading is for a Trader don’t put the right profession with the wrong occupation.
I have to believe that when you referenced gamblers you really meant losing gamblers. I paid my way through 6 years of college gambling on pool tables and bowling lanes. After that I made good daily profits at Blackjack until I got tired of the travel.
There are two kinds of gamblers, those that give their money away and those that take it. I do not think it is any different in trading. The professionals survive by, knowing the rules of the game, following good money management techniques, capitalizing on the opportunities, recognizing when the match or game is not in their favor, and not letting their ego get in the way of their exit. The victims believe that on the next game, bar, their luck will change and they will win. They stay in the game until they have nothing left to give. One game, bar, of hope after another.
The first goal must always be to survive to play again, money management and small loss techniques. The second goal must be to make a profit. The order of these two goals is not negotiable and without a doubt the first is the most critical. If the first is followed the second will follow.
Just like in billiards, on an individual basis, the market is a zero sum game, one winner and one victim. In the long run the one with the most skill and discipline will win. Sometimes the so called "Lucky" will win a game, trade, or so,and be motivated to play again. They globalize their few wins into victories and believe that they will produce streaks that will make them winners. The professionals know they will lose some but will win most. They rely on rules, skill, and discipline, not luck.
To many trading is a business, to many others trading is a game. It is the money of the game players that support the businessmen. If you are trading for the emotional ride and have not taken the time to learn the rules, learn to manage your money, reduce your losses, and keep your ego out of it, then I and my fellow businessmen, professional gamblers, thank you for your business.
You may think this is harsh or egotistical but believe me it is reality. Unlike on the pool table, I and my fellow businessmen cannot see your face, but we know you and we make our living from your bets. Please take my humanitarian admonishment and learn the rules of the game, learn to manage your money, minimize your losses, and keep your ego out of it. If you do these things you will become a colleague.
Don,
You are spot on.
Adam
i been a gambler and trade for a long time, i said first learn the game before try to make money..understand everythin...
Been trading for a year now, after so many ups and downs, this article is straight to the point.
good trading ideas.it reflects what i did in market one month before. thanks a lot
Don't feel bad Rajesh,
About 10 years ago, during a particularly emotional time, I managed to lose $60,000 in a single month by forcing trades so I wouldn't have to deal with my personal issues. We all have to fight our demons.
Les
This article put trading in proper prospective!
so we dont expect it booming all the time! Its worthy to note. Thanks
Oh, REALLY! I've seen plenty of stocks break their legs AND suddenly fall ill!
I see your point, Helena. Although stocks usually give more advance notice than horses do. 🙂
Ryan
Hi Helena,
Yes, occasionally you'll get bitten by a surprise earnings warning, but more often then not traders get hurt by scheduled events that they know are or occurring. Earnings reports, Federal Reserve meetings, Analyst presentations, economic reports, etc. Trading during these events is just gambling.
Les
Hi Helena,
Yes, occasionally you'll get bitten by a surprise earnings warning, but more often then not traders get hurt by scheduled events that they know, or should know, are occurring. Earnings reports, Federal Reserved meetings, Analyst presentations, economic reports, etc. Trading during these events is just gambling.
Very nice article , as a new trader it makes one rethink what trading is and isn't .
Excellent article. It's always helpful to read about the basics of successful trading. It reinforces good trading habits. Thanks.