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Trading 101

 

There really is something very exciting about letting the dice roll and betting on the outcome. The odds are known, the rules of the game are clear and if we get lucky, we win the whole lot. It is estimated that more than 1.6 billion people gamble during any given year, but I would argue that everything we do is a gamble. Every decision we make, whether subconscious or not, has a probability study at its root. We naturally assess whether something is risky or not and the outcome weighs heavily in our decision making. Deciding whether to have eggs for breakfast is very different to choosing which house we are going to buy.

 

Cleansed of this notion that “gambling” is bad and all we want is to make money, brings us to trading. You can trade anything from shares to bonds, commodities or currencies. And you can trade on hundreds of markets, under many different conditions, rules and customs. But we are not here to explore what to trade, but rather we want to learn how to trade. Therefore, let us look at the essential elements of every successful trade and how to make the probabilities work in our favour.

 

First you need an input, in other words you need to decide whether something is going to go up or down. The way people come up with their trading views differ widely: some use fundamental data, others use technical analysis and even macroeconomic predictions. But whatever the methodology, the only thing that really matters is what do we do if we are wrong? Here the theories are endless, do we cut the position if it goes down 10%, do we add more, or do we sell half? There really is no right or wrong answer, there is only making money or not. From experience, it helps if you set a rule, any rule, because the worst thing is being unable to make any decision and incurring heavy losses. Remember, if you have to get out, you can always get back in. 

 

The next part seems obvious, but you also have to decide how much you are going to bet on each trade. In other words, you need to look at how much money you have, how much you can afford to lose and how many bets you can make before all your money is gone. If you are worth a billion and sit at the £100 blackjack table, you will have a much different trading style than if you are down to your last million and you bet it all on Bitcoin. The important thing to remember is that it can always go horribly pear-shaped, and the only way to have the numbers work in our favour is to keep playing the game. Adjusting the size of bet allows us to remain solvent while the markets are irrational, or whatever we tell ourselves when we get it wrong in our trading.

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