The value of trading systems�Your thoughts?

I recently had a conversation with a long-time associate and fellow trader about trading systems, methods, and strategies and their similarity to gaming systems. My good friend is a brilliant mathematician and was a professional blackjack player. Note that I use the past tense. With 6 or 7 decks in the shoe, along with changes to the house rules, he no longer feels he has a sufficiently significant edge over the house. (I have no idea. I don�t go to casinos nor do I know the house rules for high stakes blackjack.) Sorry for the ramble� Our conversation led to trading and forex � my latest side interest.

My friend shared with me an email solicitation he received. Some of you may recognize the �system�. They have advertised on this very site. I read the solicitation without making an evaluation as to the merits of the particular method advertised. I do not know if the plan will work or not. I am not criticizing the author or his system.

The author suggests that trading [U]is[/U] gambling. He briefly discussed gambling systems (martingale progression) and how casino game rules are manipulated to guarantee profits for the house. One could make similar arguments relative to trading �slippage� and commissions. [U]He suggests, in sum, that your entry method is not important � only your money management is.[/U]

Reading through his reasoning did raise several questions worth addressing for beginning traders and veterans as well. I would like your thoughts and opinions. Please share your personal experiences as well.

In your view:
Can trading be equated to simply gambling?
Is trading different than investing?
Does it make any difference as long as you achieve the desired result?

How important is your entry/exit strategy?
How important is money management?
How are these two related?

Finally, here is an interesting, somewhat amusing, excerpt from the advertisement:

I hate to sound like a pessimist but in case you haven�t figured it out yet, most �trading strategies� are one big lie! During my first two years of Forex trading, I had been lied to by multitudes of companies on the internet. I really feel that I was scammed, conned, lied to, and ripped off by those companies. It�s sad to say but the truth is most trading strategies on the net are one big lie designed to do one thing and one thing alone, and that is� TAKE YOUR MONEY and run! The result is that 90% of all people starting a trading account will never see an income from it.

So, why should you believe that I am any different?

Thanks in advance for sharing your ideas and experiences!

[I]1. Can trading be equated to simply gambling?[/I]

It certainly can. It all depends on your approach. For that matter, you can treat the Forex like it’s Las Vegas, if you want. The question is… do ya feel lucky? Well, do ya? Seriously, though, when you see people talking about having a system that gives you an ‘edge’, or spouting risk-to-profit (aka profit-loss) numbers, or speaking in terms of probability, those are all terms that loosely relate to gambling.

I personally don’t equate it that way, though. In my mind, trading Forex is [B]not[/B] the same as gambling. Why? Because when you gamble, the house writes all the rules, and they give themselves the edge. In the Forex, you are free to write some of your own rules. If you don’t take the time necessary to learn how to do that, then trading Forex is [B]exactly[/B] like walking into a casino. Without the casino style ambience, of course.

[I]2. Is trading different than investing?[/I]

Not as far as I’m concerned. Either way, you’re investing a certain amount of capital with the plan of turning an eventual profit.

[I]3. Does it make any difference as long as you achieve the desired result?[/I]

Not really. Money is money.

[I]4. How important is your entry/exit strategy?[/I]

You won’t get into a trade without an entry of some sort, and you won’t get out of one without an exit (unless you get a margin call), so I’d say having a plan for each is pretty important. I generally don’t care too much about where I’m entering, but I do pay attention to the direction in which I’m entering.

When exiting a trade, I want a strategy that will let me cut my losses while allowing me to remain in a successful trade. This seems more critical than choosing my entry point. I currently use take-profit and stop-loss triggers, and when I get the chance, I trail my stops by about 30 pips from the peak price.

[I]5. How important is money management?[/I]

Extremely. It’s hard to assess potential profit and loss without a good money management scheme. How can you expect to profit consistently if you don’t know what you’re risking, and what you stand to gain? How can you expect to manage large amounts of capital if you can’t manage small amounts?

[I]6. How are these two related?[/I]

Very closely. I set my exits according to a chosen profit-loss ratio. This ratio, along with the size of each trade, represents a big part of my money management plan.

Another interesting thread! And yes, that’s right, I’m going to be the black sheep on this one and say risk/reward is more important than money management! Why you ask, well look at it it this way, this is where you get the edge in the method you have, this is where your psychology can be crafted, and this is where you can begin with what I think is an important part of trading - RISK management. Now I do feel money management is important, but not as important. Ok so, for one thing, your risk reward ratio does help with your psychology. I know this because I overestimate risk and in doing this, I am able to take trades with ease. It makes it much easier not to commit to your trades, and cut them when you need to. Ultimately if you lack in putting one foot forward there is a greater chance of you stumbling back. Next for the edge. Without an edge your system is useless, and without a defined risk/reward ratio you have no defined edge. Finally risk management. Most people confuse it with money management, and I guess you can say one can’t thrive without the other, but I like to keep them separate. Anyways knowing the risk/reward ratio will allow you to risk a specific amount in order to gain another. Managing the trade is also important, but survival should be first. That is my thoughts anyways on the poll and I am very comfortable with them. Now for the questions:

  1. Can trading be equated to simply gambling?
  • It depends on the game, however, I am not familiar with gambling too much. Poker, Blackjack, some guy on the forum said he made consistent profits with horse betting, I guess can equate with traing. However, I think you have to define your risk first.
  1. Is trading different than investing?
  • Well, I’m pretty sure investing, you either win / or lose everything you have but I could be wrong as well. The thing about investing is that you are more commited to the stock, but I don’t know to much about that, so I’ll just move on to the next.
  1. How important is your entry/exit strategy?
  • Exit is key no doubt, with entering, it is slightly important because if you enter during the news or when the market is erractic there is a high probability of losing money. For me it is important to enter consistently though, my mindest is just that way since I like to trade with probabilities on my side.
  1. How important is money management?
  • Money mangement as I mentioned in the beginning is very important, how you manage each trade will determine your success. This is more or less your exit, and what you do while the position is open.
  1. How are these two related?
    Well money management is your exit, and mangement of the trade, but again, your exit comes from your risk reward ratio.

Alright, that’s it, back to the grind! Have a good one eh!

I was all set to vote that way too, Shadow. But after I thought about it a while, I realized that the risk-reward assessment is part of my money management plan. That’s why I see money management as more important. It’s the bigger picture that the risk assessment is already part of.

I simply do not see how one can separate the two concepts.

Point well taken, I may have jumped the gun on this one, but what is written is written. However, think of it this way. Ultimately discipline will make the trader out of all the mindsets, similar to risk management to money management. That’s the way I see it. I just choose the specific rather than the whole. I think the view is the same, only the theory is different. Best eh!