Learn to lose small
Put a bet on through a bookie and the reality is, if you win, they lose and, more importantly, if you lose, they win.
Work that out and you will realise that behind that flashy smile and flirty comment the bottom line is that they want you to lose. It is in their interests that their customers lose. An ethic that would doom most businesses to the graveyard yet, after centuries of losing customers money, the Bookies are still, somehow, in business.
They stay in business of course because everyone loves to punt, needs to punt even. They stay in business because they provide an “essential service”. But most of all they stay in business because they make money. We have to ask why they make money. Why, with the worst customer service ethic in corporate history, they are still in business. Work that out and maybe we too can win occasionally.
Well it’s simple. There are two things Bookies do well that investors and traders can learn from:
The first is RISK MANAGEMENT. Not losing money. Bookies succeed because they put structure around risk. They manage risk. It is the same in the stockmarket with the new breed of stockmarket bookie, the CFD providers. They too take the opposite side of your trade and notably, they make a lot of money (out of clients) and most of them are owned by companies with their roots in spread betting (bookies).
They will tell you that controlling risk means knowing when to hedge and in particular, who to hedge. You probably have the idea they hedge everything, but they don’t. It would cost too much. Instead they simply identify people who have a habit of winning and when a winner takes a position they hedge the risk and move the price against others betting in the same vein. With CFD providers it means they can save money by differentiating between the good traders and the bad traders. That’s why they ring you up, to suss you out, to rate you on a "do they know what they're doing" basis. They rate clients 1 to 5. 1 being a nuff nuff and 5 being a professional trader (adversary). If they can't work out where you are on the scale they just watch what you do and depending on your form, the winners they hedge, the losers, they don’t.
Which brings up the second reason bookies make money. By TAKING BETS OFF LOSERS. Off Joe Public. Off the majority. Off the people who don’t take their betting seriously. People who fly by the seat of their pants. People who “love having a punt” or in other words, “Love to Lose”. This is where the real money is. The frivolousness of punters is a secret known only to the finance sector providers and in particular by all the big spread betting companies….which is why they own CFD businesses. Because they are tapping the rich vein of people who want to punt the share market without an edge.
There’s no need to hedge people without an edge, all they need to do is encourage their activity with a host of well established bait. Like blowing smoke up customer’s arses. Glamourising the life of a trader. Telling them how sophisticated they are. By trumpeting, as they do on TV screens in the casino, the winners but not the losers. In the finance sector they also suck you in by offering sexy software, for free. And, most importantly of all, by making it really easy and terribly tempting to just “click and trade” and place that bet.
But amazingly enough when it comes to making money as a do-it-yourself trader it is not the product you are up against. On the contrary CFDs are a fantastic product for winners. What you are up against is something far more dangerous. Far more damaging. It is you, or more accurately, your weak and feeble mind that is in no position from a standing start to be trading highly leveraged products against professionals.
Even more amusing is that there are short courses that purport to teach you how to win at trading. Learn to win at trading in a few hours. Not likely. But they do teach you enough about technical analysis to feel confident. The perfect storm.
So what do you do? How do you narrow your odds.
Well it’s what you don’t do first. You don’t trade just because you can. Just because you can trade shares or CFDs from your kitchen or on your mobile in a taxi, as one glamourous Forex trading CFD advert suggests, doesn’t mean you should. Just because you can cut wood and hammer nails doesn’t make you a successful builder. And just because you can trade the markets doesn’t make you a trader. Impatience and ignorance is what the bookies rely on and what their customers consistently deliver.
What you do do is educate yourself about what it really means to be a “Trader”. Ultimately trading is a business activity. It is not glamourous. It is not exciting. It is methodical. It is a routine. It is boring. 50% of the game is handling risk, 40% percent is discipline, 9% is vigilance and 1% is picking winners. You can’t do it part time. But 99% of financial advertising will tell you that picking winners is 100% of the game...and that "you can do it".
Pick up any book about traders and you will see that this is a big task, a huge undertaking, to take on the rest of the market and expect to win. You will be humbled. Time and again.
A trader is a title you will only gain through many losses and much experience, through constant effort and an appetite for education and whilst you elevate yourself from beginner to “trader” you have to try not to get wiped out. Something few achieve, especially starting in highly leveraged products like CFDs. That means start small, start on paper even and meanwhile get educated and expect your education to take time.
To trade successfully the first step is to do what the professionals do and learn how to put structure around the risks you take. Subjects to study include things like position sizing, before you can stick your neck out you need to learn how far to stick it out. That means assessing your appetite for risk. Developing a plan. Developing a system, a system that you will develop for the rest of your trading life. Then all you have to do is not give in to the irresistible temptation to let loose.
Trading is everything you have been told it is. Interesting, fulfilling and challenging. But it is not punting and it’s not sexy or and its not glamourous. It is business. You have to learn how to do it not just do it. Just launch in and you will lose your money. Especially in CFDs. Great for winners, disastrous for everyone else.
Step 1 in your education is do what the bookies do. Learn how to lose small. We address that in our articles about trading and stop losses.