Friday, October 09, 2015

Trading or gambling?

Every so often you stumble across a trader who has made a significant amount of money on a single trade, in a short period of time.

But then when you read a bit more, you actually find out that, to generate this profit, they risked an amount equal to the profit - or even more.

I came across one such trader a few weeks back, where he got a large profit (in monetary terms) in only a few days from a single trade. But the amount risked was even higher!

Was this such a 'great' trade? To the hard-nosed, experienced trader, no.

In pure maths terms, the actual profit gained was less than +1R. But in monetary terms, it was huge for this guy. Now, if the amount risked was only a small amount of his equity, then fair enough. But that wouldn't make it a special trade that would generate the responses his post received - it would still only be only a small winner when expressed in terms of R.

Instead, the tone of the thread and his excitement at the gains made strongly hinted that this was an all-in 'punt' that went his way. In other words, there was no risk control. He was prepared to risk his whole wad on that one trade.

The worrying thing for me was to see all the virtual back-slapping he got from other traders wanting to know how he did it, jealous of his success.

Well, I've got news for you. On this one trade, he got lucky. On any subsequent trades, the odds will be increasing that he will lose and therefore blow up his account. If he's got any sense, he would realise he got lucky, and now use stronger risk control going forward. But somehow I doubt it.

There is a big difference between seeing a potential opportunity, acting on it at the appropriate time, while controlling your risk and the potential downside to your account - that's calculated speculation - compared to going 'all in' on a trade hoping to make a killing. That's gambling.

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