If you are reading the title and is thinking that trading is gambling, this article probably isn’t for you. Because your fundamental framework of the investment world is already wrong, and I don’t think this article would change your perception otherwise. However, if you are here to learn to make money out of the markets, I’d be glad if you can continue to read on.
I usually hate comparing trading and investing with gambling. They are completely two different type of activity. What’s more, it makes those who are ignorant about trading feel that they are right when they say trading IS gambling.
My inspiration for this article came shortly after my first live poker game with my friends over the weekend. It was a pretty interesting experience for me, because I have played online poker many times, but never ever did I experience live poker before. After playing for about 8 hours of poker that day, I’ve drawn the similarities between trading and poker.
When playing poker, you have to be NOT emotional. One losing round should not affect your decisions for the next. We may want to bet bigger or be more aggressive on the next round just so that we can earn back our losses, but that usually leads to a bigger damage, isn’t it? The same goes for trading. Sometimes we hit a bad streak and we get into revenge trading mode, trying to recoup our losses. If you have traded like that before, you know that it doesn’t work. In fact, you will lose more if you tried revenge trading.
Let me ask you a question, does it really matter if you are on a losing streak, be it in poker or trading? You know that as long as you have a good strategy to play the game, you ought to be confident about your losses and know that they are part of the game!
Everybody has their style of playing
Some people like to play aggressive, while some likes to play it slow. It all depends on the individual. In trading, everybody has their style of making money out of the markets. You can literally copy other trader’s trading strategy and still not be profitable, not because of the strategy but most likely because that style of trading doesn’t suit you.
To me, the most important skill of poker and trading is the psychology behind the game. Once a poker player or trader learns the psychology of their games, they can then try out the various kinds of strategies to play, or even develop their own strategies.
Risk Management (Knowing when to fold)
Of the 3 similarities, I’d say this is the most important of all once you are ready to be a profitable trader.
In a poker game, sometimes you are the small/big blind and you have a bad hand. What do you do when someone raises? Clearly, folding would cut your losses, and that would help you preserve some of your playing capital. The same goes for trading, not all trades work out well, and you know closing a small loss position is definitely better than letting the loss grow larger. Cut your losses and move on!
The only way you can play this game (trading and poker) for as long as you live is to preserve your capital when the odds are not in your favour, and going all-in (or at least take a bigger position) when the odds are IN YOUR FAVOUR.
If you are completely new to trading, or would like to learn a bit more about it, I would strongly recommend you to read more about trading and its psychology from this book called Market Wizards, written by Jack D. Schwager. It is a compilation of interviews with the top traders in the world, where they talk about how they lost lots of money before they finally became who they are today. It is a book that is really easy to understand. I am currently reading it right now, and I would say it is certainly one of my top reads.
You can get the book here from Book Depository. It is a UK online book reseller and they have one of the best prices you can find around. What’s more, shipping is free!
If you have any book recommendations, do feel free to drop me a message!