Tuesday, 29 July 2008

Trading v Gambling

OK, I’ve touched on this many times in the past few days on various posts and comments but I wanted to tie up some loose ends here.

My background is gambling and as I’ve said before, I want to learn to trade now. I can turn a profit from gambling but I don’t like the losing streaks and I don’t like the uncertainty. This probably shocks some people reading this but I am a very risk averse individual. When I lose £200 on a race trying to trade, that’s not because I’m a risk lover. That’s because I think I’m getting value (or was getting value when I was trading).

I find gambling easier for 2 main reasons. Firstly, when I gamble, I know how much my liability is. If I have £20 on a horse I think will win, I know I will lose £20 on a horse when I lose. Secondly, I know when to work out when I’m getting a value bet. If a horse should be 10 and I see it at 20, I know it’s a good bet.

If I am trading a horse at 6 with £50 stakes, I know my liability isn’t £50 but because I’m not really trying to steal a 1 tick profit, that liability soon rockets when I’m wrong. Worse still, I’m liable to increase my liability on a drifter due to the value concept and I end up with far too much of a liability on a horse.

Importantly, when I trade, I don’t know when I’m getting value. If I trade a horse at 20 because I think it should be 10, this is no good if the market thinks it should be 30. I end up just trading a drifter and getting in trouble.

I need to only trade when the signals are clear that I should trade. If I really want to back something at 20 that is drifting, don’t trade it, just back it to win!

Clearly, I need to redefine my strategy somewhat to be able to cope with drifters better. I need to separate trading from gambling. At the moment, I’m gambling while I’m trading which is killing my profits and importantly, increasing my losses substantially. I need to have clear rules for when I gamble and when I trade.

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