Trade Like a Gambler Or Lose it All
Let’s not beat around the bush -- trading is gambling pure and simple. If you haven’t realized that by now, if you continue to labor under a some naive illusion that the market can be “understood” through analysis -- be it technical or fundamental -- well you are on your way to the poorhouse sooner than you think.
Trading is not investing. Never has been. Never will be. It’s not about achieving long term growth but about harvesting short term gains. Those gains are function of two things -- how good are your tactics are and how strong is your risk control.
In short, do you approach markets like a professional gambler or like a sucker on weekend trip to Vegas?
I bring this up this week because my friend John Netto -- who is a professional trader -- was in town this week to give a presentation at an institutional conference on the similarities between trading and sports betting. He was kind enough to share his PowerPoint with me and I was blown away by the content.
Mind you I haven’t watched professional sports in fifteen years. I couldn’t tell the difference between the Red Sox and the Redskins much less tell you who won the Super Bowl last year, so John’s presentation on the nuances of teaser bets was a massive challenge for me to understand.
After several hours on Wikipedia and various football betting sites I was finally able to put together his line of thought. But that is really beside the point. What struck me about John’s presentation was just how scientific it was. He had done a massive amount of historical research about both the distribution of winning margins in the NFL as well as the teams most likely to beat the spread over decades of play.
In short his whole approach to gambling had nothing to do with who was “hot” this week or what he “felt” about any given team. Like a true professional he couldn’t give less of a f* about any individual outcome. His process was based on large sample size, clear historical record and a few intelligent filters to improve the handicapping. Furthermore, he couldn’t care less how his bets did on any given week or month. He was looking at the system as a whole and like any good gambler/trader he was focused on number of occurrences.
The single biggest challenge I have in educating retail traders is to get them to think about number of occurrences rather than individual winning or losing trades. The focus on the most recent past is very natural and human. It only takes three negative outcomes for most of us to give up on an activity. But that is why most retail traders lose. They think like casino suckers not professional gamblers. That’s why the first step to becoming successful in the market is to change your perspective on the game. Do it now and you will thank me later.