Forex Trading Tips: A Trade Not A Gamble
A Trade Not A Gamble
“Why are you not taking this trade?” one of the subs asked me in our live trading session on Friday. I had just pointed out a possible setup but held back from pulling the trigger because the risk factor was too high.
“Because I am looking for a trade not a gamble”, I replied. Live trading had gone exceedingly well that day as we made money in both the London and the North American sessions and I even made money in between on a setup I had suggested before we took a break. But the comment that I casually threw out into the room had lingered with me all day long. So allow me to explain.
I have never played poker for money, bet on baccarat or blackjack or even dropped a dollar in a Vegas slot machine, but I have gambled plenty on a myriad of financial instruments. Like every trader (maybe even more than every trader) I have made thousands upon thousands of utterly idiotic, impulsive market decisions. “Have a hunch bet a bunch” is an old Wall Street saying that’s often delivered with rueful smile because the consequences of such behavior are always catastrophic in the end.
What’s a difference between a trade and a gamble? It’s the difference between a guess and a plan. It’s the difference between doing something just because you feel like it and doing something because you have a logical reason for your action. The killer irony of trading is that quite often the gamble will make you money and the trade will not. Then you wind up learning the absolute worst lesson. You start to believe that it doesn’t matter, that it’s ALL just a gamble and that markets have no rhyme of reason to their flow.
The reality cannot be more different . Markets are actually quite rational, but that rationality is based on the sentiment of the crowd. Your job as a trader is to figure out the most likely path of the crowd given current market conditions.
Every trade requires a plan. You have to know exactly why you want to enter, what you are willing to risk and why risking the pips makes good sense in that particular case. Note in all of the trade planning I never once focus on reward. Reward is always indeterminate in trading. You can set a target but the chance of reaching it will be different each and every time. That’s why professional traders never give back profits. If there is one rule that K and I live by it is -- NEVER TURN A WINNER INTO A LOSER.
hat also is more difficult than it seems. Taking profits too early will cap your gains but being greedy ultimately results in losses. In the end a trade is always a compromise. It’s never perfect but it doesn’t have to be. Trading simply needs to be good in order to be profitable. A trade is essentially a business plan for managing risk, and if you don’t have one every time you enter the market -- well then my friend, you are just gambling.