The relationship between technical analysis and gambling

argument

When it comes to trading, people often compare trading to gambling. Some people believe that there is a certain degree of randomness and uncertainty in both stock trading and gambling, so there are similarities between the two. First, let's clarify the difference between gambling and trading. In gambling, the results are completely determined by luck, and you cannot influence the results through any technology or strategy. However, in trading, although there are risks, you can develop strategies through technical analysis and use probability to evaluate risks and returns. Technical analysis is to predict future market trends by studying the historical data and price trends of the market. By identifying patterns in price charts and indicators, traders can develop buying and selling strategies. It's like the ancients came up with the weather forecast method of "don't go out if there is morning glow, and travel thousands of miles if there is evening glow" when science and technology were not developed at that time. The essence is also probability and experience. This is why some people say that technical analysis is not science at all. It is just based on the vague correctness of historical data with a high probability, which also makes sense. Probability also plays a key role in trading. Through the method of probability, traders can evaluate the probability of success of trading strategies and determine appropriate stop loss points and profit targets. In this way, even if a transaction fails, you can control the loss and maintain profitability in the long run. (I have discussed the argument of probability in detail in "Article No.: 0196 [Panda Talk] Probabilistic thinking is the watershed between trading masters and ordinary novices!")

in conclusion

So, in summary, trading is different from gambling because it is based on data and strategy. Through technical analysis and probability, you can better understand the market and make smart decisions to reduce risk and achieve profitability.


Why do some people say trading is gambling?

Why do some people say that trading is gambling? That is because when we actually execute a transaction, the market always has unpredictability and emotional factors of our traders.


Unpredictability Let’s talk about the former first, unpredictability:

Although technical analysis and probability can help reduce risks, market changes are still diverse and complex. Sometimes, even based on the best analysis, the market may deviate from expectations and lead to trading failures. Therefore, technical analysis cannot predict market trends 100% accurately, and it is this unpredictability that reminds people of gambling because the results are not completely controlled by the trader.


how to respond

How to deal with it?

That is, look at each transaction independently. A common mistake among traders is to judge the right or wrong of trading decisions based on the results of the transaction. All transactions that stop profit are considered correct, and all transactions that stop loss are considered wrong. Then let me ask you, suppose I bet with you, toss a coin to guess the head or tail, and I am willing to pay 1 to 2 (I win 1 yuan and lose 2 yuan), are you willing to play with me?

The answer is: I must play, because I will be the one who loses money in the end! Because if you place a bet, even if you may lose once, the decision you make each time is still correct. Because from a long-term average, if you keep betting and participating repeatedly, such a "gambling game" is extremely beneficial to you. Because you know in your heart that as long as you play enough times, the probability of both sides will be close to 50%.

Similarly, if the trading decision of a losing trade is correct and it follows a profitable trading strategy, then although the trade loses money, it is still a good trade for you, because if you follow the decision of the trade and repeat the operation, you will be profitable from the long-term average result. For a single trade, no matter what the probability of profit or loss is, or what the risk-return ratio is, the trader cannot predict the result of profit or loss in advance. Some good trades will lose money, and the trader must accept this and must insist on making the right decision and keep doing such trades, because from the long-term average result, it will be profitable. As long as the profitable trading strategy is executed as planned for a long time, the loss of a single trade does not mean that the trading decision is wrong.

On the contrary, if you make money by shorting in the bull market, even if the result is profitable, I don’t think it is a correct transaction. Because the reason why you can make money may be precisely because the rise of a certain cycle/level has reached the end, and a callback should indeed occur. You just "made money by shorting in the bull market by luck". But we all know that any money earned by luck will eventually be lost by strength. The "strength" here means: you will think that you have the illusion of "talent for making counter-trend orders", but as a result, you keep shorting-holding orders-explosion, shorting-holding orders-explosion... This is why I often say in class, "Compared with the losses in our trading system, those occasional profits outside the system are much more terrible." "Some opportunities know that we may lose money, but we still have to do it, because that is an opportunity in our trading system; some trading opportunities may make money, but we can't do it, because it is not an opportunity in our trading system." (See Panda Coach's Golden Quotes)


Trader's emotional factors

The second most common factor that leads people to believe that trading is gambling is the trader’s emotions: In trading, emotions often influence decision-making. Emotions such as greed, fear, and anxiety may cause traders to make impulsive decisions rather than based on rational analysis. This emotion-driven trading is similar to the behavior of gamblers at the table, who may impulsively place bets without considering the potential risks.



How to deal with it? How to deal with it?

From now on, you should train yourself in daily trading psychology. In addition to sticking the following two small notes on the bedside or the side of the computer screen, you should also use some scientific methods to heal your trading psychology and gradually strengthen your psychological muscles. For example, in our daily trading process, we are often affected by profits and losses and cannot execute trading strategies according to the original trading plan, resulting in lost opportunities. How should we solve this problem? At this time, we need to solve it by changing our focus. For example, we can eliminate it through meditation, cognitive dissociation and other specific methods.

For example, when our daily trading is going well, how should we determine our own uniqueness? When we encounter setbacks in our daily trading, how should we find our own spiritual support? So that we can choose to persevere? Let us know what is the biggest difference between us and other traders? What is my trading vision? The answers to these questions are actually our core concepts as traders. ......

All of the above methods come from Britt Steenburgen’s book “Daily Trading Psychology Training”. This book is now available in our Panda Bookstore. You can read it for free in the Panda Bookstore, or you can ask the assistant to get the e-version of this book for free. I hope this book can help you.