Gambler Or Technician

Discussion in 'Words of Wisdom' started by CreditViolet, Sep 3, 2004.

  1. CreditViolet

    CreditViolet Guest

    Are You A Gambler Or A Risk Technician? by Richard McCall

    There's a world of difference between the two.


    At one time or another, most members of the trading community have had to defend trading as not being "gambling." To the general public, gambling has many negative connotations. When professional gambling is mentioned, most people immediately think of compulsive gamblers who obsessively seek out the excitement of unpredictable risk and lose their paychecks or othermoney that may be crucial to their basic survival.
    But gambling is not necessarily bad or evil. In fact, it is a necessity of life, whether or not we recognize it! Just getting up in the morning has its intrinsic risks and can be viewed as a form of gambling. Indeed, professional traders are essentially professional gamblers. But in order to be successful at it (and to live at peace with the "gambler" tag), it is essential to appreciate the difference between being a "gambler" and a calculated "risk technician."


    GAMBLING VS. RISK-TAKING
    In making a distinction between "gambling" and "technical risk-taking," it is important to remember that there is risk in any type of business undertaking. Opening a coffee shop can be risky. Buying investment real estate can be risky. Even transferring to another division within a company has its risks. But in all such examples of risk, there are also the offsetting potential gains, against which the intelligent person weighs the odds of success. Therefore, when dealing with the detractors of trading in your life, it is important to first make it clear that there is a gamble to any and all forms of business undertaking.

    Although trading in that it involves a risk-to-reward assessment is a form of gambling, it is vital to make a clear distinction between the inner dynamics common to compulsive gambling versus intelligent, potentially profitable technical risk-taking.

    A five-year study (1996-2001) conducted by The Mastery Group International with more than 100 traders showed that a side-by-side comparison can be made between active trading and the game of casino craps. Using a playing account as small as $100 and a self-administered action interpretation matrix that focuses on 10 key risk-taking dynamics and issues, traders could efficiently identify whether they tended to think and behave like gamblers or like risk technicians. If gambling traits turned out to be dominant, then the players were determined to fall into one of three gambling categories:


    Compulsive
    Amateur/social; or Professional.
    In the first category, compulsive gamblers were found to be addicted to the intrinsic risk of gambling. They must gamble to get the euphoria that risk-taking evokes. These gamblers have no discipline. In the second category, amateur/social gamblers are mostly interested in the fun of gambling. These gamblers don't see the need for a system and even view "systematic discipline" as a party-killer. They prefer to hope that Lady Luck will bless them with the occasional "monster roll" or, in trading parlance, the huge price breakout.

    Obviously, there is no place for these first two types of gamblers in the world of trading. Unfortunately, the cynics of trading tend to confuse compulsive and social gambling with professional gambling, even though these two gambler types are polar opposites.

    In the third category, professional gamblers tend to make excellent professional traders in the long term. They are comfortable with risk, and they see risk as a means to an end. They assess and manage risk carefully. They know the math of the game thoroughly, and their actions are dictated by the risk-to-reward ratios as they evolve. They are ever-vigilant for high-probability opportunities, and bet only when they find them.

    Such gamblers represent the risk technician, which every trader should aspire to become. These elite technicians also represent the much talked-about "Elite 15," those traders in the top 15% of the business, who continually make withdrawals from the markets while the remaining 85% of market participants continue to make deposits.


    IT'S NOT A GET-RICH-QUICK GAME
    Many novice traders make the mistake of bringing the compulsive or social gambling mindsets to trading. They view trading as stimulating entertainment, or as a way to get rich quick. If you've got money to burn, then there's no harm in taking this attitude toward trading. In fact, your money is welcomed by those risk technicians who want to make profits.

    However, the wrong gambler's mindset can and will wipe out your trading account. If you are serious about trading professionally, then changing this mindset is vital. You must never forget that the objective of professional trading is making a profit. Not only does that mean learning a winning trading methodology, but it also requires careful risk assessment and management, disciplined money management, emotional and behavioral discipline, and the ability to execute your trading strategies flawlessly, as if they were art forms.


    FORGET THE RUSH
    If you wish to become a winning risk technician, then don't put on trades just to get a rush of excitement. Seek out high-probability trade setups, and wait patiently until you find that setup where you can win. In gambler's parlance, "You've got to know when to hold 'em . . . and know when to fold 'em."

    In addition, you must recognize and embrace the importance of money management. On each roll of the dice, a professional gambler/risk technician risks only a calculated amount, so as to anticipate and eventually recover from the inevitable losing streak. Losing streaks are a fact of life for the professional gambler and trader, and it is vital to manage your risk, your money, and your attitude in order to survive those periods when your timing is off or the when the odds are against you.


    TAKING TRADING INTO PERSPECTIVE
    In summary, rather than being offended, it can sometimes be helpful to consider the comments of the critics and detractors of your trading career. Take the time to put things into true perspective by honestly reviewing your own possible gambler tendencies. And if you discover that you have them, then make a firm commitment to transform any destructive gambler weaknesses into constructive risk technician strengths.

    Start thinking and acting like a casino owner or an insurance underwriter by carefully discerning the odds, making sure they are in your favor. Only then can you take advantage of the law of averages to ensure that over a large number of trades, you will make a steady profit. Then the next time you are confronted by a critic who claims that your trading is "nothing more than gambling," just smile and tell them that you are a "professional risk technician" who is firmly in control of your own financial destiny.
     
  2. billauday

    billauday Member

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    hi everyone,
    i feel gambling is negative sum game where as trading is zero sum game.Gamblers depend on pure luck and traders depend on probability.so traders are not gamblers.So never care for those who doesnt know the difference .

    comments are welcome.
    uday
     
  3. CreditViolet

    CreditViolet Guest

    Hi billauday
    You got it slightly wrong.Gambling as such is not negative sum because you dont pay the casino any money than you put at stake.However trading is completely negative sum because you pay your broker your commision,then there is slippage,You place the order at say 80 and it gets executed at 81.Stop losses executed way below their placed levels are just examples that trading is negative sum and that most traders will eventually lose money because market doesnt has any money than the trader himself.
    In a zero sum game one person wins and other loses but in trading many traders lose just to make one profitable.Also no matter who wins or loses brokers,dp's always make money.Your comments are welcome.
    Regards
    CV
     
  4. billauday

    billauday Member

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    hi creditviolet,
    well i come up with you and i was thinking that in casino the odds are in favour of the house,so you can never win in the long run but where as in trading the odds are in favour of the trader so if you bet systematically you can win in the long run.There will always a stream of losers to help the winners in the markets but in casinos there willl be a stream of losers to enrich the casinos.that was my main idea behind my previous thread,anyway comments are welcome from our members.
    thanks
    uday
     
  5. arun

    arun Member

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    Trading or Speculation is making informed decisions!

    Gambling is shooting in the dark!!!

    Just my 2cents or 2paisa.
     
  6. CreditViolet

    CreditViolet Guest

    Hello Arun and Billauday
    I say speculation is not about making informed decisions.It is a game of incomplete information like poker.By the time a news or tip is confirmed the market has completely turned around.So a speculator anticipates with available tools before anything is confimed by other market players.
    About gambling,there are some absolutely professional gamblers like Sam Roth who have actually made their fortunes gambling.Most people loose money gambling because they do it for the kick,the excitement,uncertainity.Even Warren Buffet and Bernard Baruch have mentioned and praised the skills of professional gamblers.I am posting a couple of articles here.I am not praising gambling as such but as a trader I think there is a lot I can learn from professional handicappers.The same mental framework and discipline apply to both fields.Below I am posting an article mentioning similarities between poker and investing.
     

  7. CreditViolet

    CreditViolet Guest

    POKER AND INVESTING

    Poker
    In poker as in investing one can learn the basics in five minutes and spend a lifetime understanding the subtleties.

    The skill set for success is similar

    “As they say in poker,’ If you have been in the game for 30 minutes and you don’t know who the patsy is, you’re the patsy!”
    Warren Buffet


    The key to winning is folding
    In order to win consistently in low limit poker you have to fold a lot of hands. Why? Because in an eight handed game, the probabilities say you’ll only have the best hand only 12.5% chance

    But folding is hard because it’s ‘no fun’, unnatural and requires patience and discipline.

    “More money is lost by players who know the right thing to do is, but don’t do it, than for any other reason. Having a Strategy, a Game Plan and the Discipline to stick to it are, along with a sufficient bankroll, the four most important things that a player needs to be a winner.”
    -Ken Walker, winner’s Guide to Texas Hold’em Poker

    Similarities between poker and investing

    • Patience and discipline are key to both
    • Both are games of incomplete information
    • Must understand probabilities
    • Must Understand Human Nature
    • Minimize losses and maximize gains
    • Must control emotions



    Probabilities ---Understanding Pot Odds

    Q: In five card draw, with a four flush or a four card open-ended straight draw,is it correct to call a$10 bet with $50 in the pot?

    Mental Process: Count Outs (47 unseen cards). Flush (38/9)=4.22 to 1. Straight (39/8) = 4.88 to 1

    A: Yes it is correct to call because pot odds (5 to 1) are better than odds making either a straight or a flush


    Undersatanding Human Nature

    People are victims of cognitive illusions due to the phenomena of risk attitudes, mental accounting and overconfidence.


    In investing as in poker hope can be very expensive indulgence



    Poker Maxims:

    "Have the Best Hand, The Best Draw, or Get Out."

    "Raise or Fold"

    "The bets you save are as important as the bets you make."


    Controlling Emotions

    Regret, Anger and Self Pity can be killers. In poker it is called "Going on tilt".

    Stay in the moment. The most important question is always: "What is the correct thing to do next?"


    Other Similarities
    Game Selection is critical to success
    Need to be conscious of the rake
    You can learn a lot by analyzing your mistakes
     
  8. SwamiNathan

    SwamiNathan Well-Known Member

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    Hi Credit Violet
    There are difference between Gambling and Speculation. In Gambling we expect smething without supportive rationale. In speculation we expect something with supportive Rationale - the Rationale may be Fundamental analysis, techinal analysis, or anything else.

    We can measure, find Rationale and play poker speculatively. At the same time we can hope without any reason and gamble on equities in the name of trading.

    In your words, the "third catogory professional gamblers" are speculators and other two are gambler. And both - trading and playing casino - are not zero sum game. Both involve cost. In trading you pay brokerage, In poker, if you calculate the probabilities you will find that the winning points are calculated after reducing 5 to 10% as institution's profit. Thus casinos cost more than equities.

    Pls give your comments

    thanks.
     
  9. amar

    amar Member

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    Hi CV
    I would like to say that if u take trading as gambling u are here to lose. If u take trading as investment, do ur homework and use ur head - u r on.

    Amar
     
  10. hareshbhaip

    hareshbhaip Member

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    Trading is SIMPLE but NOT EASY my freinds.

    It is like a doctor make surgery with 99% accuracy. If he fails by any means, patient may DIE. In our trading business, if we take any wrong decision, we will die financially soon and no one is responsible for the result.
     

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