Currently, I’m flying across the country to visit some family I haven’t seen in a while. And because I’m a trader, I know I’ll be on the hook for a million questions about the market’s next move.
It’s always the same kind of questions…
What’s the Fed going to do next?
What’s the one stock I can’t afford to miss out on?
Is the market going to crash?
Isn’t trading just like gambling?
But I don’t mind. I get it – money is important to all of us.
And if there’s a chance my investments could go up in smoke – or if there’s a huge opportunity just around the corner – I would want to know too.
Here’s the thing, I don’t think that having the answers to those questions will help my family make any money.
The only exception is that last question about gambling and trading.
And I’ll get to that question in just a minute. But first, I want to tell you what I tell my family around the dinner table…
The truth is I have no idea what the Fed will do and when. Not with absolute certainty, anyway. And I don’t know what the best stock over the next few months is going to be. Anyone who claims to have these answers is lying.
At best, we’re all making educated guesses. Sure, some folks’ guesses might be more educated than others. But all anyone can tell you is what they think will happen.
I don’t dwell on these kinds of questions too much because they don’t help me make money as a trader.
For example, even if I definitely knew what a stock’s earnings report would be ahead of time, there’s no guarantee that I’ll know exactly how the stock price will perform once that earnings report is released.
How often have you been in a trade, in which the earnings report comes out positive and the stock gets crushed? Then, you frantically comb through different analysts’ interpretations of the aftermath, and they’re all saying the upside was already priced in.
Of course, those same analysts weren’t suggesting the upside was priced in before earnings were released. It turns out even the blind can see with the benefit of hindsight.
Now, this brings us back to that critical question of whether trading is just another form of gambling.
My answer is that it depends on the person doing the trading. There’s no doubt a lot of traders are certainly gambling.
If you want proof, just head over to Reddit’s WallStreetBets community, where countless “Redditors” gamble away their paychecks weekly.
So, what’s the difference? It’s simply that gamblers are amateurs. They look for the exceptional, while professional traders look for the probable.
Gamblers are interested in “meme” stocks and dogecoin. In other words, those rare “moonshots” that make for the even more rare “rags-to-riches” stories.
Yes, some folks have made overnight fortunes in the markets. But for every one of those lucky individuals, countless others have lost everything by betting it big on a risky investment.
It’s the exact reason why casinos will always be popular… it’s all about that chance you might strike it rich if it’s your lucky night.
Casinos don’t mind the odd player cleaning them out. It serves as a reminder that maybe you could actually win big at the roulette wheel or the blackjack table.
Of course, for every gambler that makes out like a bandit, there are two dozen more that walk out without a penny in their pockets.
After all, the house always wins.
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When it comes to the market, however, things are a bit different…
Professional traders only act when they know they have an edge – an advantage that tilts the odds in their favor. This is what allows them to pull consistent profits from the markets repeatedly.
That edge could be a specific trading strategy, a chart pattern, or a combination of different indicators that tell you when to take a trade. The important thing is that you can recognize your edge when it’s there.
For example, my edge is built around chart patterns.
I look for patterns like triangles or the head and shoulders, which alert me to high-confidence trading opportunities. If I see a pattern I recognize, then I know my edge is present, and I can look to take a trade. If I don’t, then I wait.
You see, I know that a chart pattern will pop up sooner rather than later, and I’ll have an excellent trading opportunity to sink my teeth into.
Now, I’m waiting for my edge to appear in the charts.
I see a lot of different markets showing great potential for big moves (like forex)… but that doesn’t mean I pull triggers right away.
Knowing when not to trade is just as (if not more) important than knowing when to trade. Remember, a trader’s primary responsibility is to preserve their capital.
I’m sure you’ve noticed that it can take a long time for a position to generate a decent return. On the other hand, you can incur a painful loss very quickly.
Whether the markets are a casino is entirely a matter of perspective. If you think they are, you’re likely taking a gambler’s approach to your investments.
On the other hand, the markets can be an incredibly consistent vehicle for generating steady returns.
Amateur or pro, the choice is ultimately yours.
Happy trading,
Imre Gams
Analyst, Market Minute
P.S. Right now, conditions in the forex market are shaping up to be the best they’ve been in a long time. And I believe all traders – regardless of experience – can make consistent returns trading currencies. That’s why I’ll be focusing more on forex in the weeks ahead. Stay tuned…
Reader Mailbag
In today’s mailbag, Jeff Clark Alliance member John shares his thoughts on trading…
I was the new trader that blew up my account. But within the last year of using your technical analysis to get better fills in trades from several services – and after a few winning trades – I lost my number of trades by percentage of wins so that I can hold on to a good portion of my earnings.
I’m also likely to fully close out a position at your initial sale recommendation than to keep throwing positive trade wins to rebuild my account cash. Instead of 6 or 10 contracts I’m trading 1, 2, or 6 and it’s working. One day I’ll be able to ramp up the number of trades for higher dollar wins but for now I’m working to minimize loss and maximize gains to keep moving forward.
I’ve also worked on managing my emotions – mostly FOMO (fear of missing out) – so I can cut losses or let profits run. Not sure if that’s what you were looking for, but I’ve found mathematical certainty in keeping my number of trades proportional to my positive wins.
No “all-in” trades anymore. I like the technical indicators of RSI, momentum, CCI, full stock, RSI stock, and Chaikin money flow as some sort of gauge to enter, wait, or exit trades. Seems to be working.
– John H.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].