Trading is of course gambling. You won’t hear such a frank admission from the mouths of most financial experts because they are loathe admitting that Wall Street has more to do with Vegas than with Main Street, but hey, let’s call a spade a spade.
We practice the art of predicting the unknown. Therefore we gamble. And so do weathermen, pollsters, buyers for Woolworths and a host of other professions where uncertainty is at the core of the game.
Instead of denying it we should embrace this idea, face the truth and perhaps become better traders as a result. There is a right and a wrong way to gamble. The wrong way is to throw ever increasing money into the pot hoping to recover your losses. That what all losers do, be they at the roulette table at Montecasino or holding a bad EURUSD position in their book.
The key to gambling properly is to do so only with the houses money. So how do we translate this into our trading environment? Whenever we take a trade we obviously are always gambling because we are dealing with unpredictability: we assume risk to achieve any kind of reward. But there are 2 ways of assuming risk: a dumb and hopefully a smart way.
The more intelligent way of assuming risk in the FX market is one which most of the top traders use namely the 1-2 method: start to scale out of positions putting ½ out at a short target, put your stop loss at breakeven and then try to get the rest of the position on a long target. This gives you the opportunity to bank consistent profits throughout.
But why does this approach work so much better? Once you banked some profits you have met your psychological and monetary goal and you can stay in the trade risk-free and hope to make really big money. At least that’s the way it would work in an ideal world.
Now, this scenario happens very rarely. This happens 1-2 times out of 10 but this is exactly how things happen in life. If you think about it: 80% of your sales come from 20% of your customers. Life is a very asymmetric: it’s always a small proportion that makes the biggest amount of profit. In our strategy we’re able to stay in the market risk-free and hope that the market goes our way. We always want to trade from a position of strength and trust that 20% of the time this will result in a really good trade just by taking advantage from this simple rule of life.
Rudy – Professional Forex Trading Mentor
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