Is trading gambling?

Introduction

Overview: Louise Bedford introduces the Talking Trading Show and shares a story about her childhood experience with a neighbor who won the lottery twice.

Near Miss Psychology

• Louise explains that near miss psychology is at play in the stock market, and introduces her guest Bill Moore, founder of FastTrading.Academy.

What is an Edge?

Overview: Bill Moore explains what an edge is and why it is so important for traders. He also explains how to determine an edge and why it is important to have one when trading.

What is an Edge?

• An edge is the reason you are the favorite when playing a game or sport. It is the reason you have a positive expectation.

• Without an edge, people can easily fall into the trap of near miss psychology, which gives them just enough hope to get hooked.

• An edge for investors might be finding differences in balance sheets, while an edge for high frequency traders might be being the first to place orders.

• For traders, an edge might be based on mathematical and statistical techniques that look for mispricing in similar groups of products.

Probability in the Markets

Overview: Bill Moore explains probability in the markets and how it relates to having an edge.

Probability in the Markets

• Probability is important to understand when placing trades, as there is a range of outcomes that can happen.

• Without an edge, it is closer to gambling than trading.

• Probability is determined by looking at the likelihood of certain outcomes occurring.

• Having an edge means having a higher probability of success than failure.

Understanding Probability in Trading

Overview: This section covers the importance of understanding probability when trading, and how to handle Black Swan events.

Back Testing and Forward Testing

• Back testing is where we look into the past and see if a system would have been robust enough to work in the past.

• Forward testing is using real money to put it in the market to test a new system.

• It is important to have a system that is robust enough to handle different scenarios in order to trade effectively.

Handling Black Swan Events

• Black Swan events are real and happen more frequently than what a standard bell curve probability distribution would tell you.

• They are infrequent enough that we can't model them, so Traders must have a strong enough plan to minimize risk on each trade.

• It is important to not risk 100% of your bankroll with a Black Swan event.

Trading Psychology and Gambling

Overview: This section discusses the differences between trading and gambling, and how to identify if you have a problem with gambling as opposed to trading an effective strategy.

Trading vs. Gambling

• Trading requires three skill sets: getting in, keeping your mind clear, and managing risk.

• Professional gamblers are divided into three categories: social gamblers, professional gamblers, and problem gamblers.

• Traders can also be divided into three categories: steady winners, losers, and problem gamblers.

• Problem gamblers think that the solution to losing is to start trading more and increase their size and do more trades.

• Professionals have ice water in their veins and don't get affected by any of it. They have a plan and run it to perfection.

• Mere mortals should step away if they feel like their trading results are affecting their decision making.

• If you're losing and think the solution is to trade more, that's a sign that something is not okay.

• Professional gamblers only take bets when they are the favorite and have an edge.

• Traders should seek risk under the right conditions with an edge.

• The universe isn't some benevolent caring parent that will bestow a goodie upon you if you have good behavior.

• Markets respond to a very strict level of definitions of terms of a trading plan that you follow and repetitive behavior.

Survivorship Bias

Overview: This section discusses the concept of survivorship bias and how it affects traders who are just starting out. It also covers the importance of recognizing that luck plays a role in success, and how to manage fear and greed when trading.

Survivorship Bias

• Survivorship bias is the tendency for people to focus on the successes of those who have survived, while ignoring the failures of those who did not.

• This can lead to an inaccurate perception of what it takes to be successful in trading, as the successes of those who have survived may be attributed to skill rather than luck.

Managing Fear and Greed

• Fear and greed can be powerful emotions that can affect a trader's decisions.

• It is important to recognize these emotions and take steps to manage them, such as setting a maximum loss per position and minimizing position size when losses are mounting.

• It is also important to remember that luck plays a role in success, and that it is not always possible to predict the outcome of a trade.

Gambler's Ruin and Need for Closure

Overview: This section discusses the gambler's ruin fallacy and the need for closure, two common mistakes traders make when trading.

Gambler's Ruin

• Gambler's ruin is a mistaken idea that because you lost three in a row, you have to win the next one.

• Trading without an edge and creating too large of a position can both lead to going broke.

• It is more apparent when volatility is high, but losses can still occur even when volatility is low.

Need for Closure

• The need for closure is the human requirement to say this happened because of this.

• People often ascribe rational things to something that's a probability distribution, which can lead to bad decisions.

• The narrative fallacy is related to this, where people change how the actual scenario came down to fit their narrative.

Try This at Home Tip

• Only make your big decisions when the markets have shut.

Introduction to Bill's Gaming Background

Overview: Bill talks about his gaming background, including poker, backgammon, chess, and Little League football.

Poker

• Bill played a fair amount of poker in college before Texas Hold'em became popular.

Backgammon

• Bill started playing backgammon in bars and eventually became one of the top 400 players in the world.

Chess

• Bill also played chess tournaments.

Little League Football

• Bill coached Little League football and emphasized the importance of having fun and winning.

Advice for Traders

Overview: Bill offers advice to traders, emphasizing the importance of practicing and knowing one's edge.

Practice

• Bill recommends practicing before putting money down.

Know Your Edge

• Bill advises traders to always ask themselves where their edge is and to only trade if they can clearly point to it.

Contacting Bill

Overview: Bill provides information on how to contact him.

Contact Information

• Bill's contact information can be found on his website, fasttrading.academy.

Practicing Trading

Overview: Bill discusses the importance of practice when it comes to trading and provides tips on how to do so.

Practice Games

• Bill has one game in place for people to practice and has ideas for two more.

Simulators

• Bill recommends using a market simulator to practice.

Paper Trading

• Bill suggests paper trading as another way to practice.

Timeframe

• Bill believes it takes at least six months of practice before trading with real money.

Advice

• Bill is happy to provide genuine advice to those considering trading.

Resources

• Links to Bill's background and resources can be found in the show notes at talkingtrading.com.