IS TRADING JUST LIKE GAMBLING?... By Jeff Wilde

I wish to write on this topic earlier on but wallaaa... one of my best guru online just did (who is clearly more deserved to explain the topic), and I hope he doesn't mind I put a copy of his article here for you to read on as well as for my future referrence...

Read it thoroughly as I am 100% agreed to all the points he has written base on several questions sent to him... To Jeff, please do not charge me with copyright reserved matter as I never mentioned that I am the author to this attached article. ;) In fact, this is an indirect compliment indeed...

For further information, you can visit his website here...

August 29, 2010

Is Trading Just Like Gambling?

Hello Everyone,

This week I'm going to shift gears a bit and answer an email I recieved as I think quite a few have probably thought the same thing at one time or another.

Jeff, I would like to get your honest answer to this question if you don't mind "fielding" it.

1.) Is the outcome of a trade, any trade, ALL TRADES exactly like the outcome for the toss of a pair of dice which is that the toss of the dice is totally without control and, therefore, the outcome is completely random and unpredictable?

2.) If the answer is "yes" meaning that the outcome of a trade is totally random, unpredictable and uncontrollable what could ever "justify" anyone engaging in trading?

3.) I know that you can never take a trade with 100% certainty that the outcome will be a winner, in other words certainty of outcome is impossible because the trader is always dealing with "fluctuating" prices which means that one can never know for sure whether prices will go up or down or remain sideways.

4.) So, since you can never trade with 100% certainty and since you must not "gamble", that is, take trades on the basis of them being completely random and unpredictable then doesn't it stand to reason that trading must be based on the principle of stacking the probabilities or odds in the trader's favor?

5.) Doesn't this mean that successful trading depends upon the traders ability to measure those probabilities accurately?

6.) Then, isn't it true, Jeff, that good trade management and money management are, also, vital to cover those occasions when the trades are losers so as to protect one's capital and be able to stay in "business" long enough to be successful?

7.) So, is it reasonable and rational for a person to engage in trading, Jeff?

Thank you for your views on this. - Jerry

MY COMMENTS… Great question and it is one I could talk for hours on but I will keep it short and sweet.

In the hands of a novice trader, trading is a total crap shoot and no better than going to Las Vegas. Actually in all honesty, its probably way worse than Vegas odds as its not uncommon for new traders to win only 25% - 40% of their trades. This is because the novice doesn't have the knowledge and experience to come up with and implement a strategy that has a statistical edge.

If you think you can just buy a couple of e-books or $97 robots and beat the market then you will be highly disappointed as there is no easy exact formula for trading success.

The bottom-line is your going to have to invest in a bunch of programs and gain an overall education. You're also going to have to spend a lot of time watching the markets unfold real-time as this is the only way you'll learn to read the market and understand how the markets move. Just doing this alone will help start giving you an edge.

The good news is that unlike going to a casino, there are certain chart patterns that happen on a regular basis that occur way beyond a 50/50 chance. The nice thing to is that the computer can help you sift through many of these patterns through back testing.

Sure, back testing is based on historical data and doesn't guarantee future results but… It at least tells you just how far the odds are in your favor.

Another thing to keep in mind is that 90% of traders lose money but 10% make a living off of it and… A certian percent of them make an insane amount of money. If trading was truly like gambling then there would be no 10% making a living.

And perhaps the biggest secret to putting the odds in your favor is to have perfect money management skills and not allow your emotions to derail your progress. Yes I know that you know what I said isn't really much of a secret but odds are for 90% of you reading this, you haven't mastered the last bit fully.

To sum it up…

You can beat the markets but…

If your not willing to put in a lot of time and effort into this then I would say go to Las Vegas. At least you'll get a vacation and some free drinks. :-)


Until next week, peace and prosperity,

Jeff

7 SIMILARITIES BETWEEN FOREX TRADING & THE GAME OF GOLF...

After waiting and planning to start in 6 years, I have finally pickep up golf on last 17th June this year and since then, I discovered a new passion in this game that I almost totally forget about my bowling (but not family and trading of course). The number one reason to learn this game is due to its excitement, future  business requirement as well as indirectly telling my boss and close colleagues that my project is already completed, meaning I have done my job.

By the way, the reason that I do not include a golf article so far in this blog is simply because this game is played by over 60 milions of world population, and there are simply abundant resources on this subject matter on the internet, Astro Golf Channel 815, and especially videos from youtube.com that I personally use to search for better tips from the pros.

But what am i about to share here are the similarities and the goodies that I personally discovered and thought about when I gained more and more experience when playing this game on the course.

As for the game itself, after 2 months playing this game under a local pro coaching sessions, I could say that I could swing the golf clubs pretty well  for now especially for the irons. Have nothing to be proud in terms of distance (yet) but pretty much significant improvement on the swing and direction, though you need both indeed for this game.

In fact, I spent countless hours at the driving range, already entered the green more than 20 times in 8 weeks and participated in a mini company tournament on last 1st August and managed to get 12 points under the Stableford Game using System 36 with 24 handicap for the day. (ie golfers please correct me if there is any incorrect term used here... ;)).

I even got the "chicken" award for being first from behind... Haha, maybe I shouldn't tell this... but why not? At least I have the guts to fight and see where am I standing. For now I am still working hard on developing my swing fundamentals especially for the 1st two shots using Drivers, Woods and Hybrids.

Back to the subject above anyway... after being in the game for the third month now, I start seeing and thinking there are indeed many things that I can learn from golf that could improve my trading and vice versa. Let me share some of the things that I discovered throughout the course vs when I am sitting in front of my trading station.

1. Eagles, Birdies, Pars, Bogeys, Double Bogeys & Triple Bogeys...

You see when you are in the game, these are your targets on each hole, I mean the first three of course. So compared this to trading, it is the same indeed. If you can't make eagle or birdies (which seems impossible for the beginners), you should at least breakeven by making par (even this one is difficult for a novice like me) on each hole. See, when I compare this to my trading, that is why the experts always say that if you can breakeven your account in one year period, you are considered as highly talented trader already because even maintaining a small loss (ie bogeys) is already difficult for a beginner. Most traders lose big time, or double bogey or even double par on certain hole. Agreed golfers?

2. Various hazards - Bunker, Water, Out of Bound, Rough etc.

Just like golf, there are plenty of hazards in forex as well that includes of news, intervention talk, geopolitical sentiments, nasty brokers and many more. You got to know all these potential hazards upfront and decide on the game plan and risk management whether to go through with a big hit, wait, or stay out for certain time. If you know that you just couldn't get through certain type of hazards, perhaps the best way is to either play safe or stay out at least for a while as most of the time, the gamble is not worth it. It's all abut proper risk management somehow. Know your hazards and play it accordingly to plan.

3. Flight Members equal to your Trading Colleagues

I am not sure about others but I am affected with whom am I playng with. Perhaps people always say that this game is very individual hence there should be no effect. But come on, base on my bowling experiences, I did see pro's that suffered when they have to play their games together with beginners (during open games), one way or another no matter how strong their mental was. The point in trading here though, is that when you are trading together with your selected partners, make sure that he or she is someone that you are really comfortable with especially when changing or sharing views on the market movement. If you are partnering with someone that you hardly knew their skill levels, chances are you may start doing more ridiculous analysis base on these novices point of view which are mainly baseless. So be careful when chosing your flight members. Always play with either those who are at the same or higher level (if you can get one) than you and try to play better each time.

4. Driver, Fairway Woods, Hybrids, Irons, Wedges and Putter.

No doubt these are type of instruments that you have to have in order to play and atack the green appropriately. Compared these to trading, I am definitely referring to your trading station or facilities. The better it is the higher your chances to score provided that you knew how to utilise each of these intruments wisely. You see, for example if we talk about trading with a single notebook is just like playing golf with a single club in your bag, say Iron 7. Sure you can still play from the tee-off down to the putting green, but how efficient are you compared to those who have 14 good clubs in their bag playing at the same or higher level than you? Just think about it. So if you asked me whether we have to somehow invest a bit in setting up a good trading station... the answer will definitely be YES. Though there is no guarantee, but definitely you'd have better chances to make the cut.

5. Golf Courses = Currency Pairs

Undeniably different golf courses offer you wiith different setup and challenges. Some are more intriguing than the others in terms of challenges though the basic principle will still remain the same. Compared this to currency pairs, you just have to understand that different pairs do behave differently though the basic principle is similar from one pair to another. In order to trade certain pairs, you must at least undestand the underlying factors that trigger the movement of your selected pair. For instance, EUR/USD can be among the easiest pair to trade with low spread and high liquidity, but still you need to check, study and understand the pair accordingly prior to making any decision whether to go long or short. Just like when playing golf, there are courses that appear to be easy due to its layout and your experience, but still you can still end up in the bunker or waters just because you are not careful enough (or making silliy mistakes) with your shot.

6. Pro vs Amateurs vs Beginners

You see the level of skills and experience that you have will really differentiate your level of play. For a par 4 hole, normally a pro will hit the green (in regulation) in just 2 shots compared to amateurs and beginners where even 3 to 4 shots may seem to be very difficult. This is particularly comparable to your strength in trading where a well funded account that is run by an experience trader is very much advantegous to a a low funded account handled by an inexpereienced trader. A clear handicap is needed or otherwise you will sure not survive in the game play. Even with a maximum handicap, still the pros will normally (if not surely) make the final cut.

7. Psychology in Golf vs Psychology in Trading

Let's face it, in anything that you do, it does require certain level of mental strength and stability. If your mental is out for the day, say tired, lack of focus or worry about something else, chances you will fumble both in playing golf or trading. In order to build the mental or psychology strength in both of these, you should at least learn, understand as well as experiencing it yourself in order to improve your performance for your next game or trade. Hence, by playing golf, it can and it will build up your mental strength that will give you equal benefit to your trading career.

So, what are you waiting for? Go out and get a golf set now. At least you can trade the market during the weekdays and spend your Saturdays at the greens, since Sunday should be reserved for the family.

Have A Nice Day!

THE TRUTH ABOUT ECONOMIC NEWS VS MARKET REACTION...

I somehow hate but love economic news as they are the one that moves the market either way, especially after a period of boring and quiet moment when hardly any trader can be seen in the market base on the low volume.

But when big news comes up, sometimes when you expect big moves upon certain "red" news, it seldom happen, but on other time when you are cruising a profitable trend, all of sudden either a simple news, rumour or an unexpected breaking news arise, the market broke out and made a sudden 360 degrees turn around.

What is the real mystery behind all these? Perhaps this element of the market is something that especially a new trader may wonder how to solve. The question is... can it be solved or predicted all the time? I don't think so...

In my honest view, these are all reasons and factors that create the 'fear vs greed' element in the market. When good news or datas are published for the US, the dollar is not necessarily going up and vice versa for other currencies.

It all depends on how the buyers or sellers would respond to these news and you know what... majority wins. This is the real answer to the mystery... nothing complicated or special at all.

Just don't count on the forex analysis report after the market reacted as these reports can be be really deceiving as they (ie I meant the market analysts) always, I mean always, report something that had happened. In those reports, most of the elements written are simply reasons from their own perspective rather than the real truth on what is going on. Remember, they always have reasons to justify whatever they wrote in there.

You can read these reports of course, just like me... but do not trust these reports 100% as they only serve as reasons on why it happened rather than what really happened.

On another perspective, the technicians on the market do somehow rely so much on their technical analysis and hence barely care these sudden jerks occurence after each news. Though technically it is much easier to predict and see the market movement, somehow fundamentals or the sentiments could not be ignored and something that a trader worth to understand and emphatize as well.

The key word here is balance... a balance approach in your trading, both that includes fundamental as well as technical. Too much on either side is bad for you. Just like driving, though you knew your car has a reliable ABS and EBD braking system that could stop you within 15 meters during a 140 km/h driving speed, you still prefer not to brake at such situation as there are risks that your brakes may not function accordingly to specification due to other factors. Get the point? Stay balance by using your own wisodm & jurisdiction...

So anyway, back to the topic above... you may wonder what is the truth behind all these?

The truth is... anything can happen. Just remember indeed that anything can happen. That is my point actually.

Using technical approach especially on Fibonacci Levels, previous low and high, RSI, Stochastic as well as double or triple zero's resistance or support is very much easier rather than trying to predict how the market will react upon certain news each time.

There are 2 main problems when you are purely a news trader.

One... you do not know what is the upcoming news or data...
Two... you definitely don't know how the market will react...

So to open a position prior to these news, or simply react upon on the market response after the news release is pretty much riskier compared to trading the market during news-free period. I have done and tried so many kind of system and strategy but at the end of the day... trust me... it's all about...

...PRUDENT RISK MANAGEMENT...

You will get it right at times, and wrong on some other times... In any kind of trade, there is no way you can get it correct 100% of the time. If you don't trust me on this, ask George Soros or Warren Buffet as I am nobody compared to these guys.

The psychology of trading, the decision making, the rationality behind each trade that you open... must be well understood and justified from at least, your own point of view. Since the money in your trading account is purely your money, don't rely on others advice or tips 100% as the fact that I mentioned above still applies... no one knows what can and will happen in the market...

Take your risk accordingly... Though the trend is your friend, but the market is not... They want your money and if you're not careful... on being either too fear or too greed... you will definitely lose in the long run...

My advice is simple... Be smart but don't be too smart... at times, just follow what the market is doing accordingly and take your share reasonably base on your target (that is not too ambitious or big...). Keep it as simple as possible and throw away your ego when you trade... meaning when you're wrong, just get out and come back later.

If you can do this... I can guarantee that you will survive and prosper in your trading career for years to come...

Last but not least... no matter what, the market is your boss... he is always right... ;)

Keep this in mind all the time...

Have A Nice Day....

THE WAY WE HANDLE CONFLICTS...

Recently I had a few incidents (or perhaps arguments) where conflicts were inevitable. Matters are mainly personal that were not being addressed all these while but being held like a time-bomb that was waiting to explode, in which recently it did.

You see the point that I am trying to highlight here is, some of us, if not most, likes to sweep the problems under the carpet rather than take it face to face, especially Malays where "jaga hati" is more important than others.

For sure, no one likes the feeling of conflicts, the heat as well as the prolong argument that will not make us comfortable. But, as long as we are hiding the problems rather than working to resolve it, sooner or later things will appear on the surface. Just like one proverb that I could recall that says - "anything that can happen will happen".... whether you like it or not.

But the key to problem solving is of course, a rational and open mind from all parties involved in which this is  the hardest part especially when emotion had crept into taking over the brain control system. No matter how hard we try, the problem still facing a dead-end.

Family, works and friends. To me, all have its own vital connection and there is no way we can live with one of these missing. But to sustain its balance is something that one cannot take for granted. When you tend to focus too much on one area, definitely you will start losing the other two.

Hence, with regard to the topic that I put above, the way we handle conflicts is very subjective and do differ from one person to another. Some tend to simplify a complicated matter where others tend to over-complicate a simple matter. It all depends on personality, at least from my point of view.

To me, I always look at conflicts as an opportunity to learn or something that can turn me into a better person, or perhaps helping the other parties to become a better person him/herself, provided he/she chose to change. I am a positive person, so regardless of what happened, there is always something for me to learn upon.

It's definitely not easy to handle a conflict, but the ability to come out from it with sound resolution, maturity and wiser mentality is something that will turn you into a better human each time after you faced a particular conflict in your life.

Have A Nice Day...