We can now say you can be either a gambler, or you can be the house. How does this extend to trading?
To trade like the house rather than the gambler, you need to find an edge. There needs to be a system where we can achieve a higher probability for our desired outcome. In trading we actually call this the trader’s edge.
As a trader you build or adapt a strategy based on past events that indicate a more probable outcome. Of course there is no guarantee that you’ll be right each time. But, the probability that you will be right is in your favour. This means that without always be right, your chance of being profitable over a period of time is better.
Probability doesn’t work every time, but it works over time.
So like the house, you have better odds, you should be profitable. There are never guarantees for profitability in trading, but you now have an edge.
Now if you’re a trader that trades like a gambler, you’re someone who doesn’t have the trader’s edge. You don’t have a strategy (or you’re not following it). You don’t have probability in your favour. Even if you considered the odds exactly equal (50/50), you won’t break-even. This is because of the commissions you pay to place a trade.
Trading without gambling isn’t 100% possible, but we can decrease the level of that gamble.
The trading strategy I mentioned is able to predict more probable outcomes. It can do this based on decades of data about price movement. What you’ll find in trading is that price often moves in similar trading patterns. When you identify a pattern, it suggests that price will either go up or down. Now again, this doesn’t happen EVERY time, but more often than not.
There’s another thing to consider here too, and I’ve not touched on it yet. When you go to the casino and place a bet, and you lose that bet, you lose 100% of your bet size. This doesn’t have to be the case when you’re trading (unless you trade Binary Options, but let’s not go there…).
As a trader you have a special tool that a gambler doesn’t have. You have the ability to control your risk inside of a trade, and you can also exit a trade at any time (in most cases). This is what I mean when I say you don’t need to lose 100% of your funds used for the trade.
As a trader, I already know where I want to exit if it looks like I will lose the trade. I actually set this point on my trading platform when I make the trade. I’m referring to a stop loss which will remove me from the trade when price reaches that point. This happens automatically and my trading platform does it for me.
My trading strategy identifies a failure point based on patterns, and trading indicators. The failure point will indicate that I was wrong and my trade will most likely not be profitable
Because I have this stop loss, I have control on the biggest loss that I will take. What this allows me to do is seek to make my losses small. If I can keep losses small, and try to achieve larger gains, I can tip the odds even further in my favour. The larger the size of the profits vs losses, the less often I need to be correct. I still want to try to be correct around 60% of the time as a benchmark. If my losses are larger than my wins then I need to have a much higher win rate which can be difficult.
The balance is now in your favour. By predicting outcomes based on a more probable event, and limiting the amount of risk in each trade. Saying this, you need to understand the importance of learning a trading strategy. Possibly even more important, you need to understand risk management for traders.