Rolling the dice

Great traders have proven time and again that they can consistently win by speculating when the odds are in their favor. They have the ability to correctly assess and integrate a risk-reward ratio that statistically favors a profitable outcome. The outcome is based on a statistical distribution, whereby the probabilities are measurable when the same strategy is employed consistently. Both novices and professional traders often confuse speculation with gambling.

Speculation is derived from probabilities; pure gambling, on the other hand, is based on hope. Gambling is a less than zero-sum game in which the outcome is not based on any measurable probability. Traders sometimes gamble with positions, and gamblers sometimes count cards and play when the odds are stacked in their favor. When you become aware of the difference between speculation and gambling in trading, you'll be able to repeat profitable trading scenarios while cutting out blind gambling shots.

In gambling, the house is the one that stands to collect, because the odds are in its favor. A gambler who wins will never really be able to explain why, except to say that "luck" was favorable. If you are trading for excitement, you are probably gambling. Gambling will force a trader's hand when no plan or discipline exists.

Gambling is a sickness and an addiction in many people. Gambling is believed to increase dramatically during times of stress and pressure; many gamblers are unaware of or just don't care about their real probabilities of success. They rely on some untouchable or unexplainable gut feeling. There are between 4 million and 16 million compulsive gamblers in the United States, and a number of day traders may fall into this category. Gamblers in trading fall into the low end of the performance spectrum, if they last. They are usually influenced by some hyped-up sector that is receiving all the attention in the media. The impulsive gambling instinct causes them to trade from the hip, sometimes with an all-or-nothing destructive urge. It is hard for some gamblers not to trade if they fear they will miss the current craze.

Successful traders are diametrically opposed to the gambling types. They do not look for excitement in the marketplace; they come thoroughly prepared with a clear plan and a search routine that is methodical. Rational traders maintain superior discipline, which shields them from the human emotional biases, such as hope and boredom, that are prevalent in gamblers.

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