Forex Trading Tips: Luck, Gambling and Trading

Luck, Gambling and Trading

This week we were extraordinarily lucky. On Tuesday we went long EUR/GBP on the assumption that Euro data would be better that forecast and UK data would be worse only to see the results contradict us on both sides of the cross. So there I was sitting dejected in front of the screen as the pair ticked listlessly 15 points out of the money, when suddenly Mervyn King came on the wires and announced that BoE was considering lowering its deposit rate in order to stimulate lending.

Instantly the pair took off making T1 in less than 10 minutes and then we simply hung on for the ride ultimately banking 126 points on the trade. Anyone who tells you that trading doesn’t involve an element of luck is lying. But at the same time anyone who tells you that trading is all luck is wrong as well. Trading like poker and backgammon is a very nuanced combination of skill and chance, which is why the game is so fascinating and at times maddeningly frustrating.

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Those traders who don’t acknowledge the intrinsic nature of luck in the game will never develop the emotional strength to survive its many ups and downs. We see this regularly with our subscribers. The fair weather fans who join BK for a month or so, inevitably leave disappointed the moment we hit one or two losers in row. The ones who join us for a quarter generally have a more positive experience and those who have been with us for a year or more see their trading accounts inexorably grow larger over time.

Yet while luck is an inevitable element of the game, it is by no means the only variable that matters, That why comparisons between gambling and trading are essentially false. Take poker for example, the game of chance most often compared to trading. Both activities require skill and luck in order to succeed. However, trading when practiced properly offers much better odds.

One of the speculators greatest advantages is the ability to stand down when no compelling opportunity presents itself in the market. A poker player has no such luxury, as every hand requires an ante that can ultimately deplete the roll. Watch any poker tournament on TV and time inevitably comes when even the greatest players are faced with an “all in” moment. A professional trader who practices proper risk control and money management should never, ever come close to an “all in” scenario.

In our worst drawdowns to date we have never lost more than 6% of our capital on a cash on cash basis and even at 10 times levered we preserved more than 40% of the account at the depths of the bad run. There is, of course, no guarantee that we won’t do any worse than this, but as long as we maintain our discipline we stand a overwhelming chance of remaining in the game to live and fight another day. However, no such assurance exits in poker.

Trading is not gambling, but is subject to luck which on surface can make it appear as though it is a mere game of chance. In fact the longer you trade, the more you realize that trading is the art of removing as much of the gamble from the trade as possible. Novice traders spend all their time in the market, participating in the “action”. Professional traders spend all their time staying OUT, and enter only when the odds favor the trade.

Boris Schlossberg forex blog forex signals forex strategies

One comment

  1. Codetrader says:

    Hello Boris,

    I have a strictly mechanical stop loss theory that works pretty good and eliminates those horrendous draw downs you write about. It is very simple and easy to learn. First, you establish your bank or trading account. You never trade more than 2% of your total bank on a single trade. Upon entry of the trade you place your stop loss. It will be no more than 5 ticks below entry on a long trade. As the trade moves up, you continue to move your stop up until you are at stop loss making your trade a break even trade. Then, you allow the trade to work. You continue to move the stop up. When you practice this mechanical method you will find that the trade will always take you out and if you have done your home work you will have many more winners than losers but will never lose more than 2% of your bank. I do this mostly on the Forex and I do not trade stocks. They are too manipulated.

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