Trading : Think Probability
Submitted: 16 Mar 11 14:05
Last Updated: 16 Mar 11 14:06
 

Very often people like to compare trading and gambling. So what is the difference?

If you trade based on gut feel, you are gambling. But the outcome will be much worse. When you are trading, there isn’t a clearly defined end to your game. In the event that you are losing, the game can only end in a few ways:

1.       You bust your loss limit and the system takes you out due to insufficient fund to meet the margin requirement.

2.       The loss rolls to a stage that it is too painful for you to take, and you exit the trade.

3.       You have a pre determined loss level, and you get out as the loss hit your stop loss.

If that is gambling, then what is trading? Trading is:

1.       Your entry is based on a tested and rational decision.

2.       Your exit is pre-determined before you even get into the trade.

3.       You have an edge in the market. Meaning probability is on your side. (In a casino, the operator enjoys house advantage. A 3% advantage means they expect to win 53 out of every 100 games.)