Gambling is defined as staking something on a probability. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are Forex gamblers without even knowing it.
In this article, we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place.
The first issue is over-leverage. It is not unusual to make spectacular profits with a highly leveraged account, just as it is not unusual to throw three heads in a row during a coin-tossing competition. The sad fact is that even those spectacular profits are highly likely to be wiped out if the trader continues to make bets utilizing high leverage. The inability of the trader to get rid of high leverage after a bout of successful trades is related to a concept called the “gambler’s conceit”. The gambler’s conceit is not caused by high leverage only, but we will limit our discussion of this subject to high leverage since it’s so common among traders.
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How gambler’s conceit shows up when Trading Forex
Many of us have that genie beside our ears who whispers to us all the time that risking too much is not a problem because we are wise enough to exit a risky bet while still running profits. High leverage may be wrong, and undercapitalization may be dangerous, but our trades have so far been profitable, and as soon as the profits diminish or losses are registered, we will close our positions, and exit the game, be it gambling with cards or gambling with forex.
It’s very convincing. After all, why would one want to risk losing the profits of such a risky practice as high leverage? What is the point of continuing to practice a losing strategy even after your profits have been halved by a string of losses?
Many beginning traders who make a lot of money randomly in the forex market in a short period of time are convinced that it is their method, style, the attitude that makes those large profits possible. On the other hand, the experience and knowledge possessed by a trader at the start of his career are insufficient for practicing self-control or employing money management methods successfully. Thus, in many cases (but not always), the doubling or tripling of the account of a new trader is just a chance event, regardless of the rationalizations which the trader uses to explain his situation. What is more, even in the case of a highly successful, highly disciplined trader, the occasional very large profits are not at all a sign of increased efficiency or better understanding: There’s nothing extraordinary about the occasional extremes in a trader’s career. Instead of emphasizing them too much, and thinking about what he did right or wrong to deserve such large profits or losses, the seasoned trader will evaluate them for what they are: statistical anomalies on which neither a career nor a trading strategy can be based.
The Gambler’s conceit prevents such a rational explanation. Instead of understanding the gains after highly-leveraged bets as random developments, the trader ties these results to his own exceptional luck, skill, or insight in evaluating the market action, or to his superior trading strategy, and convinces himself that he will be able to terminate his trading activity due to his controlling power over his trading results. With such false confidence, when the inevitable large losses occur he will ponder on what went wrong with his trade, which indicator, and which scheme he needs to revise and refine, instead of accepting and understanding that gains on highly leveraged bets are illusory and unlikely to remain with him permanently. When a peer confronts him about the unusually high leverage of his trades and his irrational expectation that he can keep profiting with such high risks, he will protest by mentioning his past successes.
In fact, gains on a highly leveraged account have the potential to be even more destructive than losses. Losses will teach the trader to be humble and will lead him to revise his methods. Gains, on the other hand, will addict him to his errors. Sadly, such an addiction can only be broken by the pain of a totally wiped-out account sometimes. Fortunately for you, we’re here to warn you about the dangers associated with this risky practice.
How to avoid Forex gambler’s conceit
The best remedy for the gambler’s conceit is avoidance of the addiction entirely. Instead of consoling yourself that you will give up the practice once the profits are gone, convince yourself to never begin the unhealthy game. Do not aim at exceptional results; aim at consistency. But if you find that you’re already deep into the game of high leverage and risky practices, our advice to you is to cut it off right now, without waiting for the losses to show up. Just close the chapter, quit trading for a while, and a few weeks later, or maybe a month, restart your career by practicing sane and sensible strategies this time. Not only will you find intellectual satisfaction at having overcome a dangerous addiction, but you will also have a profitable path before yourself as you improve your skills, and recognize your errors.
One well-established method for forex traders to avoid falling into the far too tempting trap of Gambler’s Conceit is to develop and follow a trading plan strictly. Such a trading plan should be simple to follow and give clear directions on how to scan and analyze the forex market for potentially profitable trades. It should also provide the forex trader with an objective means of deciding when to enter the market, as well as when to exit the market for either a small loss or – hopefully – a larger profit.
A key accompaniment to having such a plan is the successful trading mindset that incorporates the discipline needed to stick to the plan. Having this psychological commitment helps prevent costly losses from accumulating and can also keep any tendency toward Gambler’s Conceit well in check. Basically, the degree to which they plan their trading activities typically helps distinguish the forex gambler who is randomly speculating on forex market movements for quick profits from the forex trader who views their trading activities as a business that they wish to earn money from consistently over time.
To repeat, brief periods of enormous profits are never the purpose of a successful trader. Such periods are always temporary, and the false confidence that becomes instilled in your psyche is often destructive to your career as a trader: aim at consistent profits, do not aim at very high profits.
In fact, the Forex market encounters more gamblers than professionals. Though many people don’t want to be a gambler, they also see it as gambling. And they approach Forex with the attitude of a gambler.
Several traders lose a lot of money to the Forex market because of a lack of knowledge or because they’re not able to control their emotions.
There are many signs that gamblers exhibit from which you can identify them, but let us look at the main traits for now.
Traits of a Forex gambler
- A forex gambler never follows a strategy
- A gambler won’t have any trading plan.
- He/she doesn’t know the value of his own trading journal.
- A gambler won’t follow any risk management.
- A gambler focuses more on profits.
- Instead of a detailed study, a gambler relies on gut feelings.
- A gambler wants to be in the market always.
- And they look for every opportunity to make money.
- A gambler goes for quick trades and does irrelevant tradings.
Traits of a professional trader
- A professional trader will have a forex strategy to follow.
- He/she would have complete knowledge of his strategy.
- And the professionals will develop it through learning and doing demo trading.
- The professional trader will have a trading plan
- The trader will be happy to have his own trading journal.
- And he /she will keep the records for the trades and transactions.
- For every trade, the professional trader applies risk management.
- The professional trader not only considers the ends.
- He/she also concentrates on the process of trading.
- The trader will treat it as a business, not as a game.
- They enter the trade only when there is the right opportunity.
- The professionals maintain a level head and are not emotional people.
Professional Forex Trading Vs. Forex Gambling
- Forex trading requires learning, practice, and experience.
- But gambling is based only on gut feeling.
- Forex trading can give you a regular income.
- But gambling can’t assure you a regular income.
- Forex is not addictive in nature.
- Whereas gambling is highly addictive.
- And it would turn you into a bankrupt.
- Gambling is played for fun also.
- But forex is a serious business, which involves investment and returns.
- In forex trading, though losses are inevitable, the trader will gain more money.
- But in gambling, the gambler will lose more money than he earns.
- As the saying goes, the house will always win in gambling.
- No such rigging of the process is possible in forex trading.
To sum up, a Forex gambler risks more than he/she can afford. They would receive more than 5% of their money. But professional traders won’t do anything risky. When they go for risky trades, they do it with the right tools just like Forex calculators.
Know the difference and groom the trader in you.
Vincent Nyagaka is a Professional Trader, Investor, and Author who is considered ‘The Authority” on Price Action Trading. His blog is read by over 300,000 every month and he has taught over 5,000 students from all over the world since 2016. Check out Vincent’s Professional Trading Course here.