How the Gambling Streak Can Mess Up Your Trading
I suspect practically everyone who decides to trade has a gambling streak somewhere inside them. I definitely do. I actually started work in a bookies the moment I turned 18. I loved the thrill of the horses and played the fruit machines in my lunch break.
I even became a full-time horse gambler for a couple of years but could never make that much out of it, even with inside info at times. So yes, I definitely have a gambler inside me. But that’s bad news if you want to make money from trading. The need for thrills and spills – plain old excitement – can be fatal.
How and why exactly does it mess up traders – and what can be done about it?
Some people are gambaholics. Gambling addiction, like alcohol addiction, is an illness – it will always try to conquer you and the only way to control it is never to gamble. If you’re a gambaholic, please don’t try trading – or quit now if you’ve already started.
But I reckon a less severe gambling instinct is very common among traders. Think of it as a need for a bit of a ‘fix’, something akin to taking a drug, a need for excitement. Just ‘taking a punt’ on a share for the hell of it without doing any research. Buying a share using any excuse – a mate told you or someone on a bulletin board said you could fill your boots.
It is extremely hard to expunge gambling from your brain. The lure of punts is very addictive. Traders love the idea of buying a small oil company and making a million from a tiny initial investment. After oil companies, it’s any company with a cure for cancer just around the corner. Or a penny share. Anything where there is a huge risk.
A desire for excitement can lead to big losses very quickly. Here is a story from a new trader:
“I managed to lose roughly £20,000 in the course of a few days. When you said to beware of trading the indices, I decided I knew better, and the string of winning trades on the FTSE I enjoyed over the next three months only convinced me further that I possessed a rare talent.
“I took out various shorts on the Dow and FTSE, losing all contact with sanity – convinced of a correction – then I woke up to find all my positions had been margin-called overnight as futures had risen, giving me huge losses and taking most of my starting capital.”
He told me this story in person. He knew that he had fallen into a gambling trap for the sake of excitement. He admitted he had started to get hooked on watching the indices go up and down continually. He said he couldn’t resist. Of course, the worst thing is that he started off by winning. It meant he thought he knew better even when things turned against him.
He was keen to give up gambling on trading indices and had come to a seminar to put this right and concentrate on ‘proper’ investing. He contributed well during the day and I thought he was going to succeed as a trader now that he had quit the gambling habit.
Two months later he came to a follow-up seminar. He’s a lovely guy and I was pleased to see him. He said he was doing fine on the investment front. But he had started gambling on the indices again!
I expressed some doubt about him as a trader. He had some things right. He set stop losses on his bets to try and make sure he didn’t lose too much. He was trying to take the emotion out of it – but indices move up and down too much. Stop losses just get taken out. You lose too often.
One morning he said he had woken up to find all his positions had been taken out and he had lost another few thousand. He had come to the follow-up event to try and get back on the straight and narrow.
He agreed with my reservations and said he wasn’t sure he could stop. I think I knew the reason why: again, emotion. He had lost so much to the market. Now, rather than worry about a longer-term profit, he wanted to win back what he had lost. He wanted revenge – to get his money back. This is just another way a trader gets lured into ever more gambling.
There was only one way to change: cut the gambling completely. Take indices off his screens. Only ever look at shares.
I lost touch with him after this. I fear the gambler’s need for excitement was too strong for him.
Here is another trader who went astray in the search for excitement:
“My first spread bet: I saw the FTSE Index going to hell fast and wanted some of the action. I quickly got an account set up but it took too long. Then I dived in without looking at the chart again and made a horrible fat finger trade mistake by hitting the USA 500 rolling instead of the FTSE 100 rolling right at the moment when the DOW opened with a 1,000 point loss and started racing north.
“I lost £1,500 in ten minutes. I would have lost it trading the FTSE anyway because I got in at the lowest point it has been at, but it would have moved much slower and I might have understood how to exit… Also I bought a bunch of illiquid shares and I held onto a share after I was 110% in profit, because I listened to all the screaming on the bulletin boards…”
Here is more mad gambling in the pursuit of excitement – he wasn’t trying to calmly hedge his portfolio with a short. He wanted “some of the action”, just like he got excited by the “screaming on the bulletin boards”.
How do you fix the urge to mad gamble?
It is a tough ask to totally zap the gambling impulse from your brain. For gambaholics, completely avoiding it is the only answer – even a little bit of gambling is soon fatal. For others, there is a less drastic answer.
Firstly, you have to admit there is a gambler in you looking for excitement and that it will come out at some point – maybe on a boring day. And it has the potential to destroy you if it takes hold. Keeping that awareness is important.
Secondly, open a separate gambling account.
Take 5% of your trading pot. Or 10% tops if you really must. Open a completely separate account. And I really do mean separate. It’s no good just doing this in your ISA and trusting yourself to keep track of the spending.
Gamble as much as you like within this account. Yes, really gamble. Buy all the crap you want. Small oil shares, companies with an upcoming cure for cancer. Tiny illiquid shares. Don’t bother with research; try to catch falling knives; follow any bad behaviour your heart desires…
Indeed, use your heart. Use your emotions! Gamble! This is what I do and it really works. I just use 5% of my entire capital to gamble.
You’ll find that this will give you all the excitement you crave.
One major rule, though: use a totally separate account. An example: you have a £50,000 pot. (By pot I mean the total you have in shares and cash that you have set aside for investing or trading.) Take £2,500 or maybe £5,000 of it and put that in a totally different account – preferably with a different broker. Play with that money and enjoy the gambling. Once you’ve lost some of it, only add in more if your primary money has risen significantly through investing elsewhere. Don’t be an idiot and blow the 5% and come back for another 5% six months later and another 5% six months after that.
And whatever you do, always, always limit it to a small per cent of your total pot.
If you have been finding yourself gambling for excitement, wanting that rush of adrenaline, try this idea. See if it works. You get all the thrills and spills you want without ending up sleeping in shop doorways. And the ultimate thing is: Don’t trade indices, nearly everyone loses.