A trader at Wall Street and a high roller in Las Vegas – what do these two persons have in common? Both of them wearing the most renowned clothing and accessory brands from head to heels, both of them taking their leave from the latest model by the most notorious vehicle manufacturers, both of them visiting top-class restaurants and hotels and attending the most exotic cruises, which are currently on offer. In one word, both of them having a first-class lifestyle lacking fear, pressure or struggle of some sort due to their seven-, eight-or-more-figure bank accounts! That is the general idea, the common notion, which is vastly spread among the segment of society where ordinary man belongs to.
But, is reality for financial market traders and high-stakes casino players that much saturated in pink? Is everything completely in order for them, do they really have nothing to be concerned about? The answer, of course, is a sonorous ”no”. And the reason for it lies in the very essence of both endeavors. What the common person probably misses are the miniscule details, which comprise the whole picture. Nothing could be further away from the truth than the idea that both endeavors are almost effortless and have nothing to do with categories such as ”risk of ruin” or ”proper money management decisions”. What is more, both endeavors have the potential to induce stress and a number of other negative effects related to it, if a person engaged in them fails to follow a set of rules and, what is more fearful, if he/she loses control of his/her emotions. Now that we pointed out the similarities between casino gambling and trading the financial markets, it is the right moment to note there is a certain dividing line between these endeavors, a dividing line that involves concepts such as chance, luck, skills and knowledge.
The Casino Gambler
To gamble, in general, means to play with the odds. The gambler is a person, who places a bet in hopes of a certain favorable outcome. Casino gambler is a person who engages in games of chance. Although not necessarily, but in many cases, this is a person with profound knowledge of terms such as ”odds” and ”probabilities”, a person who can do the math very well.
If we take into account gaming options, which are considered to represent the face of the casino industry, such as the notorious game of roulette, people with insufficient knowledge and little-to-none experience will probably say ”Well, what is the big deal with it – you place a wager on a number on the layout, the ball is given a spin and if it drops in the desired numbered pocket, you win, if not – you lose. It is as simple as that!” Such people really need to enrich their knowledge about the game, if, of course, they intend to take it up as a way of earning a living.
For the purpose of this article, we should say that playing roulette is an entire art. The astute casino player, who chooses this game not just for entertainment, but also for profit, possesses an impeccable understanding of odds, an impeccable knowledge of betting rules and of the ways to manage his/her bankroll. He/she knows when it is time to leave the table, regardless of his/her net result. He/she will not put at risk amounts, which are far greater than what he/she feels comfortable to lose and he/she will not attempt to chase losses, because he/she is aware there is a limit, a boundary, which is not to be crossed. Crossing it, deviating from his/her precise plan for action will cast him/her into a downward spiral leading to indebtedness and from there to frustration, stress, despondency and, in some cases, even to complete degradation of the mind. Last but not least, the seasoned player has an impeccable knowledge of almost all old and modern schemes, employed by the casino and by players, in order to tilt the scales in their favor.
High-stakes casino players who enjoy a luxurious lifestyle and expect to be treated like royalties at almost any gambling location they visit, constitute a specific segment of patrons. In the general case these are individuals who gamble not to boost their fortune (they have become remarkably well-heeled already). They do it for the thrill. To them, placing $500 or more on a single bet is more like giving a tip, rather than a serious wager. They will not mind, if they lose that sum. In fact, they will not care even if they lose $10 000 in an hour. It is just their attitude, their play style. They prefer to always be the focus of attention, to make an impression, to show off. This, of course, does not mean they are invulnerable to financial ruin.
Having said all this, we should note that, at the end of the day, roulette remains one of the games of chance, where the majority of players are likely to lose in the long-run, just because they somehow stray from the guidelines and tend to underestimate the meaning of concepts such as ”house advantage”, while relying solely on their own luck. There is a contingent of successful casino players, who do not rely on luck, but on their skills. They will usually make their choice of a gaming option with extreme precision and caution, especially when it comes to video poker or blackjack. The latter two require skills, strict playing strategy and of course, sound money management.
If we are to stress again on the concept of luck, it is the appropriate moment to note that the latter is what constitutes one major difference between casino gambling and trading the financial markets.
The Trader
To operate on the stock, bond, commodity markets worldwide, as well as on the Foreign Exchange Market (Forex) is an endeavor, which is subordinated to a specific purpose. It has absolutely nothing to do with luck and it is not meant to entertain you (though there are retail (individual) traders who claim that beside profit, they trade the markets for fun). The purpose of trading the financial markets is interrelated with three major concepts – hedging, speculating and spotting an arbitrage opportunity.
To hedge simply means to reduce the risk, to enclose a position, so that one could safeguard it from any risky factors/influences generated by current market situation. An investor who is aiming to reduce the level of risk is usually called a hedger. As such, he/she will usually strive to reduce the exposure of his/her position to price volatility, so he/she will open a position in the derivatives market, which is opposite to his/her risk-exposed position. Hedgers use an array of derivative strategies, so that they could mitigate or eliminate price-related risk.
Speculators, on the other hand, try to project price movements and position themselves on the market accordingly, so that they could maximize their earnings. We can say that speculators are risky players, they have a much higher affinity to risk compared to that of a risk-averse investor. They operate on the derivatives market simply in order to profit. In order to do so, they base their trading decisions on future trend projections, concerning various time frames. By operating on the markets in such a manner, however, they have no guarantee their deposited funds are immune to losses or that they will score gains.
Arbitrageurs usually operate in an extremely rapid environment, thus, they need to make their decisions at the blink of an eye. In some cases the price of a company’s share in the spot market may fall below or may go above its price in the derivatives market. It is such imperfection, inefficiency in the market, which arbitrageurs are constantly on the lookout for. We can say that an arbitrage opportunity is present, when an investor suffers no costs in regard to organizing his/her particular position in derivative instruments, always scores positive gains and does not take any risk. These three specific features need to be present at one and the same time. In the general case, arbitrage opportunities appear for quite a short period of time, after which they vanish instantly.
The majority of traders belong to the second group – speculators. By utilizing specific trading strategies based either on fundamental analysis (examination of macroeconomic, political and social environment, market ratios, company financial statements and others), on technical analysis (profound ability to read charts by using one-, two-, three-bar formations or even entire chart sections and also by utilizing the performance of a number of technical indicators based on price, volatility and volume), or on both, they attempt to spot discernible trends in prices and take advantage of them. To do that they employ not only mathematics and strict money management techniques, but also an appropriate mindset. By using discipline, precise trading plans and strategies, traders determine their entry points and exit points. This way they know what amount of profit they will achieve if the market goes in their direction, as well as what amount they will lose, if the market goes against them.
Trading the markets is a fine-tuned art. It is a fact that about 80-85% of day traders (who take up trading as a full-time engagement and operate within the confinements of a particular trading session – European, American and Asian) tend to lose their money. The reasons for it can be countless.
In most cases, people who attempt to trade the financial markets, tend to underestimate the concept of ”leverage”. When we refer to that term, we have in mind the use of borrowed capital in order to boost the potential return of an investment we are considering. What needs to be noted, however, is that leverage is tightly interrelated with a higher level of risk. If an investor intends to base his/her decision on leverage and it so happens the market moves against him/her, his/her losses may exceed by far the amount he/she would have lost, in case his/her market position had not been leveraged. Therefore, it is critical to note that leverage bolsters both profits and losses. It is expressed as a ratio – for example, 1:5, 1:10, 1:20, 1:100, 1:500, even 1:888. Experts in the field recommend a leverage of no larger than 1:25 or 1:50 for people with modest deposited amounts and knowledge.
Operating on the global markets without a plan or a suitable and tested trading strategy is another major reason for financial ruin. To hurl your funds in a position to buy or sell, just because the quote of the instrument (stock, commodity, currency pair, market index) was lit in green or red a number of times is nothing more but pure gambling! I know a person who had a passion for gambling at land-based casinos and who made the transition to trading the financial markets. He preferred to attend slot machines, Video Lottery Terminals and, from time to time, table games such as roulette. During his casino experience, he lost considerably more compared to what he actually earned. After busting a few decent-sized bankrolls, he decided to try Forex trading. He did not spend any time to research a bit more about the industry, to read about the basics of trading, let alone to choose and test a trading strategy. He attempted to trade, having absolutely no knowledge in the field, because he believed that it was the same thing as casino gambling. He made his ”trading decisions” by employing the following approach: whenever the price was lit in green for a few times in a row, he opened a position to buy; whenever the price was lit in red, he opened a position to sell. He probably thought he was operating some sort of a slot machine, rather than an online trading platform.
In addition, he preferred to put at stake large amounts (100 000-200 000 currency units, or 1-2 standard lots). At times, he even staked the maximum amount of currency units for his account, again as if he was willing to become eligible for a jackpot by placing the maximum bet at a slot machine. Logically, this ”elaborate and reliable” approach led him to financial ruin. Knowing when to enter, when to exit, what amount to put at risk and what factors/signals to take into consideration (generated by a technical indicator or a setup on the chart, or as a result of positive or negative events or data in economic, political or social aspect) is only the halfway to success. The other half is tightly related with psychology.
Giving in to emotions while trading is also a sure way to lose money. Emotions are the greatest adversary a trader could encounter on the market. Learning how to mitigate their impact on decision making is a difficult and continuous process, which takes years of experience to accomplish. There are five emotional mistakes, which traders often tend to make, and they all could lead to tremendous potential losses. Therefore, every trader should do his/her best to struggle with them and neutralize their effect. Those emotional mistakes are related with greed, fear, revenge, euphoria and pride. History stands as a witness of a number of cases, when traders who lost considerable amounts of money due to their excess of emotions, made ludicrous and even drastic decisions afterwards. There have been cases ranging from alcohol abuse to suicide. Therefore, putting a lid on, controlling these emotional extremes is one of the keys to reasonable and timely trading decisions. I have not once heard that a person needs to be as stiff as a rock and as emotionless as a robot, when he/she is in front of the trading platform.
Conclusion
It became evident that gambling and trading are areas with certain similar aspects – when it comes to discipline and money management. But, however, both areas serve a different purpose. For the majority of gamblers it is not profit, which stands as the primary motive, but entertainment. On the other hand, each of the three groups of traders on the financial markets are in pursuit of their specific objectives. However, we should not forget that when one makes rash, inadequate and irresponsible decisions with his/her capital on the global markets, his/her operations there are no different from gambling.
