The Risk of Trading: Mastering the Most Important Element in Financial Speculation

PROBABLE EDGE VS. POSSIBLE EDGE

It is common for those outside the trading arena to talk about this profession in the same realm of casino gambling. In fact, there are many similarities with trading and your favorite game of chance. We discussed the relationship between the two earlier in determining edge when rolling dice and playing roulette. Both encompass the elements of placing monies at risk with an expectation of a return. There is one unique difference between a gambler and a trader that supports the core need for risk management.

Casual gamblers think about the possibility of something occurring while professional traders think of the probability of the event occurring. Do you agree? Most professional gamblers would agree with this statement too. The distinction was obvious during my work with new traders. They tend to think about the possibility of becoming rich, successful, and one day trading at their beach homes or running a large hedge fund. They grasp at every trade setup that someone else has been (or at least told others that they were) successful with. They just want setups that work. Two S&P futures points per day. That's it. In their mind, it allows them the possibility of becoming successful.

If you talk with professional gamblers or traders, you immediately notice they have a worklike attitude when describing their craft. They wake up, go to work, and do their thing. When talking about trade setups or how they win at blackjack or poker, their answer tends ...