The vast majority of traders are gamblers, maybe the majority of market participants are in fact gamblers. The traders that are gamblers trade with no plan and without understanding the odds are stacked against them. Whether it is buying far out of the money options with no method for profitability or randomly chasing stocks on a whim, gambling is when you risk money with the odds against you and have no edge. The losses of the gamblers is where the majority of the profits come from to the winning traders in the markets who have an edge.
Now the other side is the traders that consistently win by using an edge that gives them an advantage over the other traders. The winning traders are not trading against the casino they are trading against the gamblers. They have become the casino, like the casino they know the odds are in their favor and they will be profitable in the long run. Like the casino has table limits they have risk management to not over expose themselves to any one bet by the gamblers. The biggest problem that gamblers have is their emotions that cause them to always lose in the long term by placing bets based on feelings instead of the odds. The winning traders trade based on probabilities being in their favor and pick their trades carefully based on the best chances of success.
The casinos are built from the losses of the gamblers, the winning traders accounts are built on the gambling of the traders with no plan, no edge, and no risk management.
Type of traders is risk management.
Professional traders are more concerned with risks than they are rewards. The gambler on the other hand comes into every trade with the attitude of, “How much can I make on this trade?” With no respect to risk this type of attitude is a recipe for disaster.
Because I have been trading Futures for years many think I am a great trader. To be honest, I am an average trader. What I am great at – risk management. Every trade I look to enter the first place I look on the chart is the point where I will be wrong on my trade. As soon as I see this I know two things:
- How much reward I will need to make this a good trade?
- Is this risk within 1-2% of my account size that I am willing to take?
Many successful traders use a good risk to reward ratio for each of their trades. Since trading has no guarantees of success we must be prepared for a loss or a series of losses. This allows us to have larger winners than our losers.
If a trader uses the rule of amount to risk they would have to be wrong almost 100 times in a row using 1% of their account or almost 50 times in a row using 2% before they wipe out their trading account. While anything is possible in trading it is highly unlikely if the trader uses the exact strategy as planned for each trade. If you are an emotional trader with no trading plan and take emotional trades then it is very possible you will wipe your trading account even if you use 1% of your account as your stop.
While this article may have sounded a bit negative about some areas of Futures trading I did this intentionally. There are too many media ads showing all the promises of getting rich trading Futures.
During our Trading Course each of our classes will show the trader about risk management and how to use it. We want to help you become Professional risk managers as well as Professional traders.
In closing remember that Futures trading can be as rewarding as you want to make it. It will take hard work and dedication on your part. There will be some bumpy roads along the way. But remember, a road with no obstacles probably does not lead anywhere. If you truly have a passion for trading the Futures markets are where you need to be trading, once you have spent some serious screen time studying and trading the markets and then getting a better understanding of your psychology towards trading you will be on your way to being a successful trader as “you” have defined success.