The Gambler Verses the Steady Eddy.

Are you a Gambler or a Steady Eddy?

I suppose anybody who is involved in trading has to have at least a slight tendency towards gambling, but there is gambling and gambling.

Are you classified as a gambler if you buy a $1 lotto ticket each week? Do you deserve to be labelled the same as somebody who blows their wages in the casino or book makers on a regular basis?

To define the word Gamble: “To take a risk for some advantage.”

Let’s look at the difference between the two, at extreme levels. Then you will decide where you fit in.

These figures below have been taken from some recent results of 20 trades.
You will see the stop loss on each trade is slightly different as it was placed just under or above support or resistance. Also the stop loss orders are moved to reduce losses and lock in profit as the trade moves in the right direction.

These are some of the important facts we need to calculate from our trading.

Average Stop = 30.4
Average loss = 24.8
Average Win = 190.0

The result of the average loss is 24.8 pips against the average win of 190 pips making the risk to reward factor a very impressive 7.66 to 1.

With 20 Trades, 15 losers and 5 winners, the Percentage win ratio was just 25%.

Over the 20 trades, the amount of pips lost were 372, against the amount of pips won 950, realising a profit of +578 pips.

Summary of the 20 trades

• Trend Riding system
• Just 25% win ratio
• Extremely good risk to reward ratio

The Gambler

Now let`s focus on the “Gambler”.
Take a look at trades 15/16/17 and you will see 3 straight wins +45 +391 +97
The gambler has a trading balance of $1,000 and decides to risk all of it on his trading and starts at trade 15 that has an opening stop loss of 22 pips.

$1,000 divided by 22 = $45.4 per pip

The result of the trade was +45 pips

45 pips X $45.4 = $2,043

Starting Balance $1,000 + $2,043 = $3,043

The gambler has been lucky and has turned $1,000 into $3,043 and decides to risk it all again on the next trade.

This trade has an opening stop loss of 25 pips

$3,043 divided by 25 = $121.7 per pip

The result of the trade was an incredible +391 pips

391 x $121.7 = $47,584.7

$47,584 + the balance of $3,043 = $50,627

The gambler has hit lucky again by turning a $1,000 starting stake into over $50,000.
The smart thing to do now is to bank the profits and enjoy the gains, but the gambler cannot do this, and they need to go again.

They use all of the account on the next trade $50,627 with a 26 pip stop.

$50,627 divided by 26 = $1,947 per pip
The result of this trade was +97 pips.
97 x $1,947 = $188,859
$188,859 + the balance of $50,627 = $239,486

$1,000 turned into $239,486 in 3 trades

This is shear gambling, and every gambler I have ever known has ended up losing all that they have, plus more.

***I do not recommend this type of trading by any means and would
never trade this way myself.***

The Steady Eddy

We will move to the other end of the spectrum now and work on the example of only risking 1% of your account balance. You will have to select your own personal levels of risk that you are comfortable with after looking at this very conservative style.
In this business, there are bold traders and there are old traders, but you do not find too many old bold traders.

I am a big fan of the Market Wizards books, where Jack Schwager interviews some of the best traders in the world at the time of writing, mainly covering traders from the 1960s, 1970s and 1980s. Out of all these traders, Larry Hite is my favourite because every trade to him is a 1% risk whatever market he is trading. When asked to differentiate between gold and cocoa in his trading, his answer

was, “There is no difference as they are both a 1% bet. He states we do not trade markets we trade money.”

Let’s look at this scenario starting with a balance of $10,000.

1% of $10,000 is $100 this is the amount we will risk on the first trade, if we lose we still have $9,900 and the next trade will be 1% of $9,900 that equates to $99 of risk. Trading this way would require a massive amount of losing trades in a row to wipe your account out, but at the same time, building your account will be a steady process. Or will it?

We will use the results from my 20 trades shown earlier in this article, and see how trading 1% of our balance of $10,000 works out.

Before each trade, you will have to calculate 1% of your balance and then divide that figure by the amount of the stop for that trade.

Trade 1 with a 20 pip stop

1% of $10,000 = $100 divided by a stop of 20 = $5 per pip/point.
The first trade will be taken at $5 per pip.

Try and work out what you think the balance will be at the end of the 20 trades.

If you come out with a figure of $13,261, you have done the calculations correctly. This is an increase of 32.6% of your starting balance over the 20 trades, only ever risking 1% of your balance on each trade, and a win ratio of just 25% (5 wins out of 20).

Increasing your account by 32.6% on every 20 trades will make your account grow far quicker than you think, using the power of compounding.

If you continued to make this percentage over the next sets of 20 trades, these would be the results

(1st set of 20 trades) $10.000 + 32.6% = $3,260 = $13,260
(2nd set of 20 trades) $13,260 + 32.6% = $4,322 = $17,582
(3rd set of 20 trades) $17,582 + 32.6% = $5,731 = $23,313
(4th set of 20 trades) $23,313 + 32.6% = $7,600 = $30,913

After the 4th set of 20 results you would have turned $10,000 into over $30,000 only ever risking a maximum of 1%.

This represents a gain of over 200%
Who said trading was risky?

*** I highly recommend this style of trading and do trade this way. ****

Now you have seen both extremes of the scale from the outright “Gambler” to the “Steady Eddy”, somewhere in between will be your own personal comfort level. But remember that trading is a mind game and you will make uncharacteristic decisions when faced with trading large amounts of money. The simpler and more stress free you can make your trading, the easier it will be to stick to your system.

Happy Trading
David Curran