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TRADER'S NOTEBOOK


Are You A Gambler Or A Risk Technician?

02/25/04 04:11:44 PM PST
by Richard McCall

There's a world of difference between the two.

At one time or another, most members of the trading community have had to defend trading as not being "gambling." To the general public, gambling has many negative connotations. When professional gambling is mentioned, most people immediately think of compulsive gamblers who obsessively seek out the excitement of unpredictable risk and lose their paychecks or othermoney that may be crucial to their basic survival.

But gambling is not necessarily bad or evil. In fact, it is a necessity of life, whether or not we recognize it! Just getting up in the morning has its intrinsic risks and can be viewed as a form of gambling. Indeed, professional traders are essentially professional gamblers. But in order to be successful at it (and to live at peace with the "gambler" tag), it is essential to appreciate the difference between being a "gambler" and a calculated "risk technician."

GAMBLING VS. RISK-TAKING

In making a distinction between "gambling" and "technical risk-taking," it is important to remember that there is risk in any type of business undertaking. Opening a coffee shop can be risky. Buying investment real estate can be risky. Even transferring to another division within a company has its risks. But in all such examples of risk, there are also the offsetting potential gains, against which the intelligent person weighs the odds of success. Therefore, when dealing with the detractors of trading in your life, it is important to first make it clear that there is a gamble to any and all forms of business undertaking.

Although trading — in that it involves a risk-to-reward assessment — is a form of gambling, it is vital to make a clear distinction between the inner dynamics common to compulsive gambling versus intelligent, potentially profitable technical risk-taking.

A five-year study (1996-2001) conducted by The Mastery Group International with more than 100 traders showed that a side-by-side comparison can be made between active trading and the game of casino craps. Using a playing account as small as $100 and a self-administered action interpretation matrix that focuses on 10 key risk-taking dynamics and issues, traders could efficiently identify whether they tended to think and behave like gamblers or like risk technicians. If gambling traits turned out to be dominant, then the players were determined to fall into one of three gambling categories:

  • Compulsive
  • Amateur/social; or
  • Professional.

In the first category, compulsive gamblers were found to be addicted to the intrinsic risk of gambling. They must gamble to get the euphoria that risk-taking evokes. These gamblers have no discipline. In the second category, amateur/social gamblers are mostly interested in the fun of gambling. These gamblers don't see the need for a system and even view "systematic discipline" as a party-killer. They prefer to hope that Lady Luck will bless them with the occasional "monster roll" or, in trading parlance, the huge price breakout.

Obviously, there is no place for these first two types of gamblers in the world of trading. Unfortunately, the cynics of trading tend to confuse compulsive and social gambling with professional gambling, even though these two gambler types are polar opposites.

In the third category, professional gamblers tend to make excellent professional traders in the long term. They are comfortable with risk, and they see risk as a means to an end. They assess and manage risk carefully. They know the math of the game thoroughly, and their actions are dictated by the risk-to-reward ratios as they evolve. They are ever-vigilant for high-probability opportunities, and bet only when they find them.

Such gamblers represent the risk technician, which every trader should aspire to become. These elite technicians also represent the much talked-about "Elite 15," those traders in the top 15% of the business, who continually make withdrawals from the markets while the remaining 85% of market participants continue to make deposits.

IT'S NOT A GET-RICH-QUICK GAME

Many novice traders make the mistake of bringing the compulsive or social gambling mindsets to trading. They view trading as stimulating entertainment, or as a way to get rich quick. If you've got money to burn, then there's no harm in taking this attitude toward trading. In fact, your money is welcomed by those risk technicians who want to make profits.

However, the wrong gambler's mindset can and will wipe out your trading account. If you are serious about trading professionally, then changing this mindset is vital. You must never forget that the objective of professional trading is making a profit. Not only does that mean learning a winning trading methodology, but it also requires careful risk assessment and management, disciplined money management, emotional and behavioral discipline, and the ability to execute your trading strategies flawlessly, as if they were art forms.

FORGET THE RUSH

If you wish to become a winning risk technician, then don't put on trades just to get a rush of excitement. Seek out high-probability trade setups, and wait patiently until you find that setup where you can win. In gambler's parlance, "You've got to know when to hold 'em . . . and know when to fold 'em."

In addition, you must recognize and embrace the importance of money management. On each roll of the dice, a professional gambler/risk technician risks only a calculated amount, so as to anticipate and eventually recover from the inevitable losing streak. Losing streaks are a fact of life for the professional gambler and trader, and it is vital to manage your risk, your money, and your attitude in order to survive those periods when your timing is off or the when the odds are against you.

TAKING TRADING INTO PERSPECTIVE

In summary, rather than being offended, it can sometimes be helpful to consider the comments of the critics and detractors of your trading career. Take the time to put things into true perspective by honestly reviewing your own possible gambler tendencies. And if you discover that you have them, then make a firm commitment to transform any destructive gambler weaknesses into constructive risk technician strengths.

Start thinking and acting like a casino owner or an insurance underwriter by carefully discerning the odds, making sure they are in your favor. Only then can you take advantage of the law of averages to ensure that over a large number of trades, you will make a steady profit. Then the next time you are confronted by a critic who claims that your trading is "nothing more than gambling," just smile and tell them that you are a "professional risk technician" who is firmly in control of your own financial destiny.

Richard McCall is the director of The Mastery Group International and the Warrior Trader Alliance. McCall is the author of The Way Of The Warrior-Trader, The Warrior-Trader's Mastery Matrix, and the developer of the "Online Mastery Bootcamp" for active traders. He is also a successful futures trader and educator, trading and teaching his personal Sabaki futures trading method. McCall can be contacted at his website at www.MasteryNexus.com, via email at DrMcCall@MasteryNexus.com, or toll-free at 800 336-7061.

RELATED READING

McCall, Richard D. [1994]. "The Warrior's Discipline Of Trading," Technical Analysis of Stocks & Commodities, Volume 12: December.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.



Richard McCall


E-mail address: DrMcCall@MasteryNexus.com


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