What Kind of Trader Are You, the Gambler or the "House"?

The way someone trades reveals a lot about his or her nature, in terms of timing, stress and risk management.

Vlad Gubernat
Vlad Gubernat

Vlad Gubernat is a full-time trader based in Romania who shares his thoughts on his blog, JLTrader.

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There are many popular ways to differentiate traders: by the average duration of their trades, the financial instruments they trade, the type of analysis used for trading and so on.

Though seldom used, there’s another way of telling them apart that transcends all the above categories: traders are either the casino, or the gamblers who frequent it. At first glance, this might appear as a fancy manner of saying that there are winning (the minority) and losing (large majority) traders, but it isn’t so simple; just because a trader is losing for the time being, doesn’t necessarily mean he’s a gambler. Or if he’s winning, that he’s the casino.

There are three main characteristics that traders who are the casino have:

– edge casino games have a predictable long-term advantage for the house – for instance, 5.26% for American roulette or up to 15% for slot machines.

This means that on average after 100 roulette rounds of $10 each, the house would win 100 X $10 X 5.26% = $52.6. Edges are not as straightforward in the markets where we’re dealing with a living, ever-changing organism.

Nevertheless, without some kind of positive expectancy – gained through various methods, be it discretionary or systematic, technically or fundamentally oriented, that are beyond the scope of this article – a trader who puts on a trade is similar to the gambler who bets on red at the roulette wheel hoping to strike it rich. Even if he’s lucky once, or several times, if he keeps playing (trading) he will lose because time is on the side of those with the edge.

Readers who’ve seen the famous 1995 movie ‘Casino’ with Robert de Niro and Sharon Stone may remember at this point the wealthy Japanese gambler who got lucky and went home with his winnings. He then got tricked by de Niro into returning and kept playing until he lost all his winnings plus some of his own money.

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– risk management casinos have various limits in place on how much one can bet. Even though they know the exact odds of the games offered, they can’t afford to let people bet huge amounts in one go. The reason is simple: one or a string of lucky bets could possibly bankrupt the casino.

Consequently, they force the player to limit the bet size, thus allowing the edge to work its ‘magic’.

The parallel to trading is obvious: traders always have predetermined stop losses whereas gamblers go with their instinct.

– discipline casinos are open year-round, playing the probabilities and managing risk. They don’t close after a bad day, week or month. Conversely, they don’t discard the table limits after a good week or month, feeling invincible. Gamblers are exactly the opposite. They play (trade) when they feel like it. And they usually risk more and more after a bad period, hoping to recoup all losses with one big win.

To sum it all up: not everyone can be a casino owner, but we all have the choice to operate like one in our trading accounts.

 

This article is part of the Forex Magnates Community project. If you wish to become a guest contributor, please get in touch with our Community Manager and UGC Editor Leah Grantz leahg@forexmagnates.com.

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