How To Remove Gambling From Your Forex Trading
Trading and investing should be in no way linked to gambling, or the use of a gambling approach. However, many retail traders confuse the two, leading to plenty of traders gambling their money within the markets, rather than trading or investing. This is only expedited by large leverages offered by brokerages and some prop firms, leading to traders being able to gamble their full account balance in just one trade in some cases. However, it’s possible to remove gambling from your trading strategy and trade as the professionals do – increasing your chance of long-term success!
In this article, we’re going to look at how you can remove any chance of gambling from your trading strategy! So, let’s get into it!
Removing Gambling As A Part Of Your Forex Trading Strategy
Historically, the gambling methodologies and trading/investing methodologies have been completely separated. However, due to the easy access now to the financial markets, more ‘traders’ than ever are taking gambling approaches within the markets.
- Not having a trading strategy
- Not understanding the results of a trading strategy
- Taking random trades
- Using random risk management
- Using no risk management
- Martingale strategies
- Human bias in trades
And much more. You may even be guilty of a few of these yourself – which may be holding you back from reaching the trading results that should be possible for you.
What Differentiates Gambling from Trading?
Gambling and trading are two entirely different things and need not be confused.
Trading is making educated decisions in the markets, with a fixed amount of risk and a long-term set of data and stats to prove your edge. There should be no human bias, no emotion and no deviation from the edge. There should be provable logic for each trade taken – with no ‘hoping’ price moves.
Gambling is the opposite of trading. When gambling, you’re making uneducated decisions in the market with random levels of risk and no long-term data to validate your decision-making. There will be human bias and emotion present – with no proof you even have an edge. There will be very little, if any, logic for each trade you take.
You can see that gambling would obviously yield much worse results over the long term. In fact, if ‘traders’ applying more of a gambling methodology can even make profits, they typically lose those profits within just a few more trades.
Why Is Gambling Not Sustainable In The Markets?
Gambling is not sustainable over the long term, purely due to the fact it is not profitable. We can look at the basic mechanics of the markets to prove this.
If you take 10,000 trades with a 1:1 risk to reward, with random entry points, you will have a win rate of 50%. Therefore, you have no edge in the markets. If you then include spreads and commissions, your edge will now be unprofitable, rather than breakeven.
Now if you factor in an inconsistent or the lack of a risk management strategy, you will potentially be even further in the red.
As you can see, you can quickly start losing money if you’re gambling and have no edge in the markets. Once you’re already stuck in a drawdown, emotions will come into play and your gambling will most likely get much worse!
How To Remove Gambling & Increase Your Chances Of Long-Term Trading Success
Now we have covered why gambling within the markets is such a bad idea, let’s look at how you can avoid applying these methodologies within your trading…
- Have A Mechanical Trading Strategy
The first way to alleviate gambling from your strategy is to have a rule based trading strategy, or as rule based as you can make it. By having a solely discretionary strategy, you’re going to be allowing emotions to drive trading decisions and frequently make the wrong decisions. Losses will feel personal, as you made the decision – rather than letting the trading system make the decision.
Adding rules to your system will allow you to step out of the driver’s seat and just execute trades according to preset rules – which is much easier to handle mentally!
- Have Data To Validate A Potential Edge
Most traders don’t have a clue if their trading plan is even profitable in the markets. This, in my opinion, is the same as gambling. If you put money on something, not truly knowing the long-term outcome, how is that different from gambling? To validate an edge, you need data. Thousands of traders over years of tick data to prove that your system has an edge. This is useful for refining trading systems, as well as giving traders the confidence to actually trade the system in periods of drawdown. Back testing is not the holy grail, by any means – but if a system is profitable over many back tests, it’s likely to be more profitable in the live markets than a system that failed every back test.This process can and should be automated to remove human bias, again.
- Have A Risk Management Strategy
A risk management strategy is crucial to success and removing gambling from your trading. This isn’t just using a stop loss. The strategy should include:
- A stop loss risk percentage value
- How many trades can be opened at once
- Where is the stop loss placed
- What is done during a period of drawdown
- What is done during a period of wins
- Where is the take profit
- Do you close partials? If so, where and when?
- Do you avoid trades with a lower risk to reward
- Do you move stop losses to breakeven? If so, when?
There are so many factors to consider – which should all be rule-based and added to your trading strategy and thoroughly tested.
We’ve seen so many strategies turn from unprofitable to profitable when the risk management rules are tweaked. This is so important.
Do Not Bow To Emotion
All of the above points mentioned are pointless if you are still a slave to your emotions in the market. You need to refuse to bow to your emotions. Stay rigid and strong within the markets and do not cave to fear or greed. You should be completely emotionless within your trading and analysis.
In Summary – Can You Remove Gambling From Forex Trading?
In conclusion, forex trading should not be approached with a gambling mentality, and the steps we have highlighted above will help you remove any aspects of gambling from your trading. By focusing on small, long term consistent gains, you will see much better results in the markets and more opportunities will be available to you in terms of prop firm funding.