One of the best trading tips I could ever give you is to avoid the notion that trading is investing. Another trading tip is never enter into the many subtle traps of trading like this notion.
Because many people discover trading through the stock market or other traditional investing channels, and hear trading called things like "high-yield investing," trading is firmly associated with the investing world, especially in the mind of the newcomer.
Trading is investing in the sense that it involves putting money at risk with the anticipation of return. All investments involve a certain amount of risk. But just putting money at risk with anticipation of a return doesn't make it investing.
Trading is often likened to gambling and there are many parallels. For example:
- There's action
- Things move fast
- Probability plays a part (what gamblers call odds)
- There are numerous uncertainties like weather, governments, news, and related markets;(gambling's uncertainties are other players, the cards, dice, or the roulette wheel).
- High risk trades (high stakes games) require emotional control
- Clouded thinking from emotions (and alcohol) results in big losses
- Everyone wants to beat the markets (or the house)
- There's big money involved
- Most traders (and gamblers) lose most of their money
- Wagers are placed in every transaction
You think that trading isn't wagering? It sure is.
Remember the movie "Trading Places" with Dan Akroyd and Eddie Murphy? The Duke brothers, a couple of wealthy brokerage owners take Eddie Murphy's character off the street and have him run their commodity brokerage. When they explain how the commodities markets work and what the firm does, Eddie pipes up, "You're bookies!"
Immediately after that he starts giving good trading advice, not because he absorbed everything about the commodities markets, but because he understood betting. And the essence of trading is betting. Acknowledge this tip of trading and you'll be in the right mindset.
And you thought you were getting into some high-yield investments. You're getting into a betting game. Whenever you buy or sell a contract or option, you're betting that the market will do one thing, and the person on the other side of the trade is betting that it will do another.
Now, one of the differences between Las Vegas and the markets is that in Vegas, if you make a bad bet (trade) you're stuck with it. In trading, you can get out of a bad bet by making a different one. There are so many traders playing the game, that no matter how ridiculous the wager, there is usually someone who will take the bet! Seasoned veterans know to avoid sucker bets. It's the newbies who take risky wagers hoping for big payoffs.
Getting an order filled means someone is taking the opposite bet. (In "thinly traded" markets you may not get "get out" because there is no other trader to take your bet.)
Trading is a game of emotional control and discipline. Placing trades is easy. Keeping your head on straight and sticking to a proven system are the hard parts.
A subtle trap in trading is that it is seen as a form of investing with all the safe connotations of long-term investing. The truth is that it is a betting game in a room of a thousand bettors. The actual nature of the activity is completely ignored in the hype.
Few people are naive enough to think that they can make a living gambling. But too many people think they can jump into trading without any preparation and make money. A simple trading tip is use your head,it doesn't work that way.
Just as in Las Vegas there are professionals and gamblers, in trading too, there are professional traders and gamblers.
Some dictionary definitions of gamble are:
1. To engage in reckless or hazardous behavior.0
2. To expose to hazard; risk.
3. An act or undertaking of uncertain outcome.
And the word calculated:
1. Determined by mathematical calculation.
2. Undertaken after careful estimation of the likely outcome.
3. Made to accomplish a certain purpose; deliberate.
1. The possibility of suffering harm or loss; danger.
2. A course of action involving uncertain danger.
3. The variability of returns from an investment.
4. The chance of nonpayment of a debt.
Real traders have rules for their occupation, they have a system. They take calculated risks and manage that risk diligently. They manage their money, play to their strengths, and have a purpose: the intent to be ahead at the end of the month.
The bottom line is that professional traders don't gamble. They deal with the many uncertainties of the markets like everyone else, but their outcomes are not uncertain. They know how every market move will turn out for them, because they have a system and a plan for every trade. They know that if they don't go into each trade prepared, the odds are against them.
Gamblers in either arena will fail to practice and build skill, fail to plan adequately, fail to manage money or calculate and manage risk. They will go outside their rules (if they have rules), deviate from their system, take impulsive risks, and fail to focus on the process. They get caught up in the excitement
Another tip for trading is that whilst gamblers play a game of chance and behave recklessly for a thrill a trader integrates their intention into their actions. They take calculated risks with the purpose of consistently making a profit.
Master the Psychology of Trading