I’ve just spent an entertaining evening teaching the evils of gambling to my two boys…
At the weekend my eldest asked what a casino was. There had been something on TV about Caesar’s Palace in Las Vegas that caught his eye.
And then after dinner last night we were playing heads and tails with a 5p coin. ‘Perfect’ I thought in my wisdom. A great opportunity to teach them what goes on inside casinos and how gambling can cost you dearly.
So we started off playing heads and tails – best out of three, double or nothing. Luke (eldest) didn’t want to risk his money at first and ducked out. Evan (youngest) put 5p on the line.
He made a few good guesses, got his pot up to 40p and then sensibly decided to stop. Luke had been watching with interest (especially once he saw Evan double that last stake with a shiny new 20p coin). And eager for a piece of the pie, he now stood up to the plate, lost his 5p immediately and handed it over to Dad with a reluctant “awww”. Lesson learnt.
But he wanted another go. ‘Great’ I thought. I’ll really drive this one home – a valuable experience to put him off gambling at an early age.
Little did I realise how wobbly things were about to get.
His new strategy was to stick with Heads and since he was in charge of the flipping I think there may have been a bit of foul play to begin with. I started to watch a little more closely once he’d cleared me out of loose change and we’d moved onto paper I.O.U’s!
Eyes blazing with excitement, he was on the verge of breaking the £5 profit barrier. ‘No problem”, I thought. I’ll just ride this one out, wait for the inevitable losing round and put my arm around him as I explained how easy it is to lose your money.
But he won again!
A few tosses later and £12.80 started to present a serious problem. He was literally leaping around the room in excitement planning which Lego set he was going to buy with his fortune.
I knew a huge tantrum was on the cards once the inevitable losing bet arrived. But with no sign of him slowing down with his bets what could I do? It was now even more important that he learnt the harsh lesson.
Sure enough, Tails finally put in an appearance and he lost. Luke suffered badly. We went through the whole repertoire of an 8-year old boy’s objections (with particular emphasis on the “it’s just not fair” one).
So in hindsight, it probably wasn’t one of my better ideas. Luke was inconsolable and kept demanding he get to take the last go again and I got a right telling off from my wife for ‘being ridiculous’. Oops!
You need a plan when you trade
But it was really interesting how those common emotions we battle with as traders were raging away right in front of my eyes, even in this small schoolboy. It just goes to show you how we come with greedy tendencies hard-baked into our psychological makeup.
In my early days of trading I remember a spell of making money week after week. When I finally reached one particular Thursday with no loot in the weekly sack I simply entered a long position before an economic report because I felt I ‘deserved’ to be rewarded by the market.
There really was no reasoning beyond that. It was an out-and-out gamble. From memory that one paid off but my luck didn’t hold much longer. I was fortunate to be shown the error of my ways while I was trading a small account. It could have been much, much worse but I took the hint – time to wipe my mouth and start afresh with a proper trading plan. No gambling!
Do you ever feel you’re not quite in control of your trading actions… your fear of missing out on a plum move drives your decisions rather than a proven trading plan?
Let me tell you exactly what signs to look for…
5 signs you’re gambling instead of trading (and what to do about it):
1) Not trading with a proven strategy. Without a sound strategy you really are stabbing in the dark. The right to trade intuitively – where you place trades based on gut feel – needs to be earned. You need to put serious screen-time in before you start getting a subconscious feel for market activity.
Solution: Stop trading and get yourself a proven strategy that delivers long-term positive expectancy! Design one yourself or pick up a copy of a tested and proven commercially available strategy to cut your teeth on (look for one that has a record of third-party audited results so you know it works).
2) Trading without a plan that tells you exactly what to do, when. The trading plan should tell you how, when, and where to deploy your strategy. You should be left in no doubt what you need to do when (it should even tell you when you should stay clear of the markets – staying flat is a perfectly legitimate position of its own).
Solution: Get your trading plan down on paper and keep it where you can see it as you trade (good commercial strategies provide you with a plan to trade by). Remember the army maxim – Prior Planning Prevents Poor Performance
3) No risk management measures in place. Do you have a method of measuring how much to risk on each trade? It can be as simple as breaking down your account into 1% ‘Units’ and risking a single unit on each trade. The location of the stop loss order will let you calculate how many units to risk (and may even keep you out of volatile markets completely – the risk may be too great for your account size on certain trades).
Solution: No risk management in place? Read Trade Your Way to Financial Freedom (Van Tharp) immediately.
4) Revenge trading. We’re moving into real gunslinger territory now. I know it can be incredibly hard to watch the market take out your stop loss only to reverse and head back in the ‘right’ direction. It’s so temping to bang a quick order in to show the market you were right in the first place and even the scores. Or equally as bad – trying to jump on a breakout move just because you notice momentum in the market. It’s fine if it’s part of your plan but a ticking time bomb if you’re winging it.
Solution: Try moving out to a longer trading time frame. Instead of day trading or scalping by the minute, move out to hourly or daily charts. It can slow you down and make you give full consideration to your decisions before you pull the trigger.
5) Emotions begin to dictate your ability to place trades. If you’re not taking all the trades your plan says you should you are gambling. You might feel like you’re playing it safe by dodging the odd trade that ‘looked bad’. But by doing so you’re riding rough-shod over the probability and expectancy of your strategy. Missing out trades can be just as bad as firing off orders willy-nilly. It does require a bit of mental toughness but this truly is the essence of success in the markets.
Solution: Stop trading, scale back the money you’re risking by using a mini-account, micro-account or even a demo account. Go back to a level at which you can make decisions clearly with no emotional attachment to monetary loss. Test the water tentatively as you go bigger again, it may be something you need to work through in stages.
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 18th January
09:30 GBP Average Earnings Index
10:00 EUR Core Producer Index
13:30 USD Core Producer Index
20:00 USD Fed chair Yellen speaks
Thursday 19th January
12:45 EUR Interest Rate Decision
13:30 USD Building Permits
13:30 USD Philly Fed
13:30 EUR ECB Press Conference
16:00 USD Crude Oil Inventories
Friday 20th January
09:30 GBP Retail Sales
17:00 USD President Trump speaks
Monday 23rd January
– no big reports
Tuesday 24th January
08:30 EUR German Manufacturing PMI
15:00 USD Existing home sales
Trade safely (no gambling!) and I’ll catch up with again next week.