Gambling Mentality and Stock Trading

A gambling mentality and stock trading can be a very disasterous combination, whether you're a new trader just starting out or an experienced trader not realizing they just are not meant out to be a trader.

Let's take a brief look at the word "gambling" and a meaning: Gambling is used to describe the wagering/betting of money on something with an outcome that is uncertain from the start, with the goal of being correct/winning and therefore being financially rewarded (receiving money).

Very few "gamblers" become successful, consistently, similar at times as with "stock traders".

Most successful "gamblers" will learn what's going on with the actual "game", study statistics and probablilities, develop some sort of "system" to follow and know when to stop. You could say the same with most successful stock traders: they learn about what's actually going on in the markets, study statistics and probablilities and develop some sort of trading system. They also know when to stop and are known to use stop losses.

A large portion of gamblers though, are not successful, especially over the long term. When a typical gambler find's themself losing, problems begin to occur and compound.

A common scenario of potential problems a gambler will run into upon losing are: 1) continued gambling to try and "make up" for the losses, 2) after running out of money due to losses, borrowing money to continue to try and "make it" back, 3) gambling behind friend and family members backs so they don't find out, 4) deviating from the system they initially followed because of losses, thinking the system no longer works so they must change. These are just to name a few.

Stock traders may find themselves doing the same things. If so, this is NOT a good sign. If you find yourself doing any of these things while trading stocks, the best thing you can do for yourself is to stop, take a step back and realize what's happening.

When I mention "gambling mentality and stock trading" in this article headline, I am referring to the similar characteristsics between stock trading and the potential problems with "compulsive gambling"/"gambling addiction". They may not be called the same thing, but to me, they are the same thing or at least very similar, they have the same traits and can have the same disasterous outcomes (along with many other similarities).

I could easily write a book on this topic. Recently, (and what gave me the idea of this article) I began playing a handheld "Blackjack" game that I found in some boxes stored at my home. When I first began playing the game I told myself "mentally" that I would begin with a goal for each time I turned the game on, that I would shut the game off when either: 1) I was up $150 or 2) I was down $100. Betting was allowed in $10 increments, up to a max of $50 each hand.

For the first few days, things were going pretty well. I was betting $10 per hand and sticking to my "system". After a few days I found myself consistently profitable when looking at the results over several days at a time. Then, I found myself thinking that with me betting "only" $10/hand, I was doing okay, but "if I used more money per hand, I could make more money, faster!", so I upped the amount I was betting for each hand to $50 (the maximum the game would allow me to, otherwise I probably would have went higher).

At first glance, most people would say that I was getting "hooked" and becoming "compulsive" and possibly even "reckless". In all honesty though, I have to tell you that I am a very detailed and analytical person so I asked myself if this was what in fact was happening, or, did I have a logical reason for raising my bets?

I did indeed have a reason and "methodology" behind my increasing from $10 to $50 per hand. When gambling, trading or investing, I will typically look at money (both profits and losses and potential earnings and losses) in percentages. Not necessarily how much of a percentage in each instance, but as a percentage of some sort of larger whole, or "bigger picture". In this example, I was initially using $10/hand and stopping at either $150 profit or $100 losses for each play. When I raised the amount per hand to $50, I still used the same targets of $150 and $100 as my goals. The "end results" were always being used in my mind as a percentage of my initial funds "at risk".

This is how I "convinced" myself it was okay. In contrast, some would have increased their betting to $50/hand and set goals of either being ahead the same 15 hands or being down the same 10 hands (+$750 or -$500) from where they started. (I also started with $1,000, so losing $500 in one sitting could be considered disasterous).

Trying to keep this article as short as possible, everything was fine for a few more days but then....

I found myself down $100 quickly one day and instead of turning off the game I told myself to "keep going and try and make it back". I went from -$100 to +$100 several times that day and wound up finally turning the game off at -$350. As I was losing more and more, I kept telling myself "that I could win it back". I deviated from my system I had in place and not only did I not win the money back, I lost more than I ever had before, 35% of my account value in one sitting.

The same thing can happen with trading stocks if you're not careful. Don't get caught having a gambling mentality and stock trading with real money at stake, you'll probably regret it.

If you want to trade stocks for the long term, study the markets and develop a system that suits you specifically, and then stick to it.




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