This article is about how I earn money from being a professional trader. Often, when I declare that trading the stocks market is my source of income, people smile and say that I am a gambler then. They say it is too much risk and all is down to luck. I answer them that they have partially right because trading is like gambling. And one can compare the stock market to a huge casino.
Now, if we are at the casino, who is losing money there? Players, of course. It is possible to win once a while, to be on a winning streak, but in the long term players will lose.
Key Takeaways🔑
| →Trading, like gambling, involves risk, but professional traders approach this risk with strategies and plans. |
| →Statistical advantage and understanding the dynamics of the market, akin to how casinos operate, can give traders an edge. |
| →Emotional trading and lack of a structured plan can lead to substantial losses, emphasizing the importance of a strategy-based approach. |
Contents
Who makes money then?
The casino. You have probably heard that the casino wins no matter what or that always the house wins.
The casino can allow itself to throw a big party, offer free drinks, or donate food. They are doing it to attract attention, to bring more people in. Because more people means more money. More money to the house.
How does it happen that the casino makes always money? Gambling is a bit of a luck game, so why in the end, the money land in the casino’s management pockets?
Read further and you will find the answers. I will share my secrets about the casino and about turning myself into the casino so I end up with the money in my hand.
What casinos do to profit from the game is faking the games so they get a statistical advantage over the market or they have positive expectations whereas the players have negative expectations.
I will illustrate this with the example of the classic game known as roulette. There is a large wheel in this game. And on that wheel there are numbers. Then there is a spinning device. At some point, after a certain spinning, the ball would land on a single number.
Your task as a player is to bet where the ball would land. Would it be a red or black number? Or maybe even, or odd?
You choose to bet on a black number. And you think your chances of winning are 50%. This is your mistake. You and the casino do not share 50/50 chances.
Faking the game
Let me explain why it is not 50/50. The game is rigged. This is true that there are 18 black and 18 red numbers. But what you might not know, or did not pay attention to is that there are also two extra numbers of green color. That is 0 and double 0. This is a small green secret that changes the whole situation.
With your bet on the black number, your chance is 18 as these are several total black numbers.
And remember there are 38 fields altogether. 18 red, 18 black and 2 green. This way the casino gets 20 out of 38 chances to win since the green numbers also belong to the casino.
Let’s change it to the percent. A player has something like 47.23% chances of winning. The casino, on the other hand, has 52.77%. Now do some mathematics and subtract 47.23 from 52.77.
5.54% advantage
5.54% is the edge the casino gets over the participant. This is the way they are making money. What does this 5.54% mean?
Well, it shows that for every dollar people bet in the long term the casino is making 5.54% of that money which gives around 5 cents.
If you look at the bigger picture it will be quite a lot of money. With a million dollars in a game, the casino wins over 55 thousand. This is why they want more people to come and bet.
Let’s assume for a moment you have a thousand bets and each one is a thousand dollars. It gives a million. Statistically, the casino will get 52.77% of the whole amount. The players will get 47.23%. 52.77% means 527,700 dollars. 47.23% is 472,300 dollars.
Let’s do the mathematics one more time. The first sum minus the second result is 55,400 dollars. This is the casino’s profit.
Now I want to show you how to reproduce such a winning model to the stocks market. And I can tell you that most people will lose trading similarly to the players at the casino. I would say 90% will lose. And there is just one reason for that. These people do not create a plan.
Many come to the markets relying simply on a piece of luck. They listen to strangers’ tips, to the rumors. They trade without any strategy and with their emotions. This is not a good way to do it.
Casino vs Markets
But look, even for those who come randomly, there are some chances of winning. They could think it is 50/50. Well, in the casino it works like this, I mean you bet one dollar, you lose one, or win one. On the stock markets though, it is usually different. People tend to lose more when they are mistaken and to win less when they are correct.
Many traders buy a stock for example for $10. They hope it will be a winning transaction. The base trading on luck and believing. But you know, this is not the best way to do business. The price of the market will likely go down.
The traders want to cover a loss so they buy again. Again hoping for the best. Again losing.
Such a circle can go on and on so in the end, the loss will be huge.
On the other hand, the traders who make a winning transaction for a small sum may want to take the profit out of the market. They are happy to win it and afraid to lose it in further trading.
Immediate gratification leads to very small profits. Fear of losing a small amount leads to huge losses. The result is that the money on the account does not increase.
Now a big question. How do professionals end up with huge profits?
I told you that it is thanks to implementing a casino business model. Now I will tell you how to do this.
Normally, it would be 50/50 chances to win and fail. But what we can do is to increase these chances by good preparations. We analyze the market and search for repeatable patterns. Then we apply the price action patterns at the right moment.
The market can go up, down, or sideways. Let’s say I observe an uptrend. But not in a straight line. It is more like a wave pattern. Impulses are alternating with the correction. You will find out that often the corrections come to a certain level. This level is called the support level.
We will buy when the price reaches the support. Because we noticed a pattern that the price touches the line and bounce back.
You may wonder is 100% sure that the price will go up after reaching the support line? Trading is never about 100%. Anything can happen, the markets are influenced by the news for example. But thanks to this repeatable pattern, we improved our winning chances by a few percent. Maybe the winning chances grow to 60%. 60% of winning, 40% of losing. Statistically, your profit will be 20%. It is even better than at the casino!
Another thing is that in the casino, players bet $1 to earn or lose $1. In trading, we invest $1 to earn more. There is the take profit and the stop loss that will ensure this. You set the amount of profit you would like to take and of loss, you would be able to suffer.
Let’s say there was an uptrend and then the price falls within some values. It will not occur every day, but from observations, you will know, that when it happens, the price is ranging and it will eventually go up again. Of course, it is never 100%. But it is more than 50% and this is quite satisfactory.
👍 Pros and Cons 👎
Pros:
- 🔹 Professional trading can be a reliable source of income with the right strategy and understanding of market dynamics.
- 🔹 Opportunities for diversification across various assets and markets.
- 🔹 Ability to control and manage risks with informed trading strategies.
Cons:
- 🔻 High-risk potential, particularly for those without adequate planning and strategy.
- 🔻 Requires substantial knowledge and understanding of financial markets and trading techniques.
- 🔻 Emotional trading and impulsive decisions can lead to significant losses.
| Concept | Description |
|---|---|
| Statistical Advantage | An edge that a trader has over the market, based on careful analysis and strategy, similar to how a casino operates. |
| Emotional Trading | Making trading decisions based on emotions rather than careful analysis or strategy. Often leads to unfavorable outcomes. |
Risk and Reward
For instance, you make an order for $10. You set stop loss at $8. So when the price falls to $8 the transaction is automatically closed and you lose $2. Now, take profit can be set for $14. When the price reaches this level, the trade will be closed and you get out with a $4 profit. That is, you risk $2 to make $4. Or you can say you risk 1 to make 2. And all that with 60% chances of winning. This is how you play stocks markets.
🙋♀️ Q&A Section
- ❓ How can I reduce risk in trading?
- ✔️ By having a well-thought-out trading strategy and sticking to it, avoiding emotional trading, and understanding market dynamics, you can better manage risks.
- ❓ Is trading the same as gambling?
- ✔️ While both involve risk, professional trading involves strategic decisions based on market analysis, not luck. In this sense, it’s more akin to poker, where skill significantly affects outcomes.
- ❓ How can I create a trading plan?
- ✔️ A trading plan should include your financial goals, risk tolerance levels, methodology, and evaluation criteria. This plan will serve as your guide in making trading decisions.
- ❓ What is emotional trading?
- ✔️ Emotional trading involves making buy or sell decisions based on feelings, such as fear or greed, rather than rational analysis.
- ❓ How can I avoid emotional trading?
- ✔️ Sticking to your trading plan, maintaining discipline, and keeping emotions in check can help prevent emotional trading. Regular evaluation of your trading performance can also help.