Trading Thoughts : A Gambling Account

Here's a 2-part series/article by BKTrader which I thought is pretty interesting. I've provided the two articles below, and I'll comment on it in another entry. :) Meanwhile, read, enjoy, reflect and see what thoughs come about.

—————–Trading Thoughts-A Gambling Account—————
Part 1
Admit it. Despite the volatility or rather because of it last week was a great time to trade. Not a great time to make money - unless you had the reflexes of jungle cat - but definitely a fun time be in the currency market. 20 rounds per day? 30? By Friday I was doing 40 and did even realize it. Of course when the dust settled I was up only modestly because wide spreads, sudden spikes and massive turns in sentiment created as many stop outs as winners. Never mind, it was rush to play and I enjoyed every moment of it because I never truly put myself at risk.

Like many FX traders I have more than one account. Almost everyone who trades FX seriously, be they retail or institutional has several dealing relationships. In a deregulated, decentralized, dispersed market that’s a smart thing to do. You never want to rely on only one point of exit in order to control your risk. But as retail traders we are fortunate not only to have many choices, but to trade smaller relative size. Since everyone in the currency market offers mini lots, its easy to open a small account and experiment to your hearts content. In fact I believe its not only easy, but also quite advantageous for retail traders to create a “gambling” account where you can go to town with your speculative capital.

What is the single biggest sin in trading aside from not using stops? No doubt its over trading. Yet telling an FX trader not to over trade is akin to telling a guy not to stare at a woman in a skimpy dress. We know its impolite but few can resist the temptation. Discipline may be the key to success in trading but when it comes to human beings all of us are subject to our appetites. Eventually everyone loses control. Much better therefore to lose it in a controlled environment.

That’s why a gambling account is so vital to your trading health. The markets will always entice us to gamble. Better to do it with a small amount of money, rather than wreck your real account. Trading books are littered with examples of guys and gals who made small fortunes in the market only to give them all back in a wildl over trading binge that typically ended up in a margin call. If you are going to get blown out of the market, do it your gambling account.

Next week, I’ll tell you how you can turn vice into virtue by making the gambling account your own little trading lab.

Part 2
Last week I talked about the need for a separate gambling account to let off steam and allow our worst impulses run wild in a controlled and contained environment. This week I’d like to suggest that a gambling account is not merely a diversion for Vegas like entertainment but could in fact be a very useful tool in our arsenal as FX traders.

Perhaps the greatest problem facing many traders is the fear of losing. It is the primary reason so many trade without stops, postponing the day of reckoning in order to avoid the immediate pain of capital loss. In fact when trading a gambling account many traders do just that - they lay on a trade, leave no stop and hope for the best. But the “have a hunch bet a bunch” strategy inevitably ends in tears and a margin call.

On the other hand, if you actually practice safe trading by always using stops, a gambling account can be an incredibly liberating, educational experience. A gambling account when used with stops can be a source of experimentation and learning. You can experiment with a variety of strategies and money management approaches that you might never consider in your regular account.

Granted you could do all of these things on a demo, but your experience and sense of commitment would be completely different. Do you really think you would be checking quotes every 5 minutes on your Blackberry on your USDJPY position if it was done on e demo account? Hardly. Even if your are trading for just a $1 per point real money makes a difference and makes your trading much more meaningful.

For me one of the most useful lessons from trading a gambling account is the realization that just staying the course can often mean the difference between victory and defeat. Woody Allen one said that, “90% of life is just showing up.” In trading this can often be true. Trading in these wildly volatile markets this week, I often would find myself in a deep hole by the middle of the day, but by sticking to my plan and continuing to take trades that were part of my setup I was able to end up positive by the end of the day. Would I have had the courage to continue if this wasn’t my gambling account? I doubt it - that’s why the lessons I learned were worth far more than the pips that I earned.