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Thursday, April 17, 2008

Trading with a Gambling Mindset

Trading should not be approached with the mindset of a recreational or a pathological gambler. Trading lore is replete with tales of traders who took big risks and paid a huge price for it. Professional trading as well as professional gambling is about risk management. One trade or a series of trades should not wipe out most of your account balance, yet many traders find themselves in dire straits. Do you trade like a pathological gambler?

The Diagnostic and Statistical Manual of Mental Disorders, published by the American Psychiatric Association, contains a pathological gambling diagnostic category. Just like alcohol use, gambling is not necessarily a “psychiatric disorder,” but when a pattern of behavior develops that causes emotional distress, interpersonal conflict, or work difficulties, a common everyday behavior like alcohol use or recreational gambling can turn into a psychological problem that may require treatment. Pathological gambling is a lot like alcohol or drug dependence in that the person cannot stop and the behavior causes impairment. For example, a pathological gambler can’t stop thinking about gambling experiences, requires larger or more frequent wagers to get the same rush, feels irritable when trying to stop, uses gambling to cope with negative moods, is consumed with recouping losses through gambling, tries to hide gambling behaviors, cannot stop gambling, and may engage in illegal acts to continue gambling. Does any of this sound familiar?

Unfortunately, many traders have made bad decisions trading and have paid the price. They may not have had a “gambling problem” in the strict clinical sense, but face a great deal of emotional turmoil as a result of their past trading. Many traders may hide their financial difficulties from family and friends, while other traders may find themselves in such as deep financial hole that they cannot climb out of.
It may be interesting to consider the extent to which you approach trading in the same way a pathological gambler approaches gambling. I adapted the South Oaks Gambling Screen to pertain to trading. It’s important to note that if you get a high score on this quiz, you may not have a psychological problem with trading, but it may suggest that your approach to trading is similar to a problem gambler and that you might want to change your approach to trading.

Answer True or False

1. It seems like I’m constantly trying to win back losses.
2. I frequently claim I’ve been making profits when, in fact, I have lost.
3. I sometimes feel as if I’m risking too much money on trades that I can’t afford to lose.
4. I risk more money on a trade or series of trades than my account size warrants.
5. I have felt guilty about the way I trade, as if I’m risking too much money on bad trades.
6. I want to control my risk (or frequent losses) but I can’t.
7. I’ve frequently tried to hide my losses from my family or friends.
8. I have had arguments about my trading losses with loved ones.
9. I have borrowed money from people to feed my account and not paid them back.
10. I have lost money trading that I can’t afford to lose (such as household money or credit cards).

If you received a score of 3 or above, you may have a problem with your trading. You may not be a “pathological gambler,” but it is worth seeking professional help to confirm that you don’t have a problem. Perhaps it is the nature of trading that those outside the profession do not understand the risk involved, but if trading impacts your emotions in a negative way or leads to problems with family and friends, it will impact your ability to trade with the proper mental edge and succeed. To trade at your best, it’s vital to manage risk, trade with money you can afford to lose if necessary, and trade high probability setups.

By Michael S.Shopshire, PhD, Mental Edge

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