Taking Trading Risk for Reward

A while back, I was spending time with a friend of mine I’ve been close with since we were kids. For years, anytime my career comes up in conversation, he insists that my involvement in the financial markets is nothing more than gambling. I actually get this question sometimes at trading events as well. It is a very hard question for me to answer because I think the whole question is wrong. Whether you are a trader, gambler in a casino, Pepsi buying advertising space on a network, retail store owner, casino, car dealer, franchise owner, street vender, someone who buys and sells things on Ebay, and so on, you are simply taking risk for an expected reward at some level. The trader and investor takes on trading risk in a market for a potential reward. The gambler risks a $5.00 chip on the black jack table to try and make $10.00. Pepsi pays for commercial television time at a network (risk) hoping to see a return (reward) on that investment much greater than the cost of the commercial. The retail store owner buys inventory (risk) in hopes of selling that inventory to you and I at a much higher price (reward). I think you get the point. If you think of it this way, the real question becomes: “What type of speculator are you”?

Are you the type who only takes on trading risk when the odds are stacked in your favor or are you the type that takes on trading risk when the opportunity “feels” right and “looks” good? My answer to my friend was simple. I said yes, trading/investing and gambling are very similar but there is one big difference I told him. I said, “Imagine playing black jack and not having to bet any money until after you see the cards and then being able to bet as much or little or even not bet at all. And, if you do place a bet, you can take all your money off the table whenever you want, that’s speculating in markets.” In trading, we have the ability to only put our hard earned money at risk when the odds are very much stacked in our favor. A casino would love to have the odds that the astute market speculator is able to enjoy.

The issue is that most market speculators can’t tell the difference between trading risk and trading opportunity. In fact, most get it completely backwards which is great for the astute market player. This novice group continuously falls for the illusion trap that disguises risk as opportunity. Why is this the case? In my opinion, it’s a combination of human emotion and just plain old laziness. People tend not to want to put in the hard work it takes to develop the market skills needed to get paid from the “un-skilled.” There are no short cuts. If someone is not interested in putting in the hard work it takes to attain proper trading skills, profitable trading opportunity will equally not be interested in them. The most rewarding opportunities always go to those who enjoy working hard, not those who lack interest in hard work.

TradeStation Live Market Analysis: NASDAQ Futures Short Setup The Setup:

Friday June 19th, I was leading a live market analysis webinar session for TradeStation members. I lead these sessions on Fridays most weeks. The opportunity was to sell short at the supply level and take profits at the profit target below, the blue line.

The Result:

The trading opportunity worked out fine for a more than 20 point NASDAQ gain while risking about 5 points. Another way to say this is… When price was in the circled area, “the bet” was that it would move down to the blue line before moving above the supply zones (black lines). Based on my supply and demand analysis and rules, the odds were stacked in my favor. The key obviously is being able to identify real risk and opportunity.

If you are a trader or investor who risks your hard earned money on the inconsistent whims of random chance, you are likely the trader trying to cut corners and find short cuts to trading success. In the world of “compensation”, over time you will get EXACTLY what you deserve. Life has a masterful way of evening the score. Your pay-back is eventually equal to your physical and mental efforts. If you’re not motivated to develop the needed skill set, you will likely transfer your account over to someone’s account who is. I have been in this business for many years. Trust me, if there was a short cut to trading success I would have found it.

You see, whether you are a trader, Pepsi, or the retail store owner, or one of the others, all that really matters is the type of speculator you are. Those who invest the time and energy required to attain a rule based strategy that locks them into low risk / high reward profits simply get paid from those who don’t. It’s how the world works.

Hope this was helpful, have a great day.

Learn to Trade Now