“Why do you think the same five guys make it to the final table of the World Series of Poker EVERY YEAR? What, are they the luckiest guys in Las Vegas? It’s a skill game”
– Mike McDermott (Matt Damon), Rounders 1998
True, trading involves risk. The incredible number of variables, high volatility and unpredictability of the various markets, make the waters of the financial world hard to navigate. And yet, just like in the quote above, those who master the skills of trading and investing do make a profit over time. Traders who are prepared to make calculated risks and put in the effort to understand the forces driving the various financial instruments have a chance of coming out on top.
Making a profit is not an easy task, but as traders become more proficient at detecting patterns and adopting smart trading behavior, they increase their chances of making good decisions. The poker analogy is quite fitting, since casual players often rely on luck and are essentially gambling, while the pros know to calculate risks and more importantly – when to fold. The trading world, however, is more complex, for better or worse. If when playing poker, all of the odds are there, in the deck that’s on the table, in trading there are forces that cannot be foreseen.
On the other hand, trading has more instruments and scenarios for winning than poker does. The poker world is binary: Either you have the best hand and you win, or you lose by folding or by being beaten by a better hand. When it comes to trading, each situation has a multitude of potential outcomes. You can turn a negative forecast for a certain asset into a winning hand by short-selling, or you can take your profits by closing a trade before a scenario plays out completely.
The key is knowing how to manage risk. The calculation of risk is what separates successful traders from gamblers. Of course, nobody wins all the time, and even world-famous traders such as George Soros or Warren Buffett have been known to lose large sums of money – but they have a long-term strategy, know how to hedge their investments, and realize that sometimes you lose before you gain, and that a poorly timed decision could incur great losses.
On eToro, each trader has a unique risk score, which measures their risk-taking behavior. Traders are ranked on a scale of 1 to 10, with 1 being the lowest. Therefore, when copying traders on eToro, you can choose who to copy based on your own risk-appetite and other factors, such as their investment diversity. The great thing is that these investors have already calculated their risks and made their decisions accordingly.
There’s no quick way of becoming good at trading. Some do have more than a knack than others, but every successful trader has put in the effort to educate themselves and learn how to manage risk. True, some have been lucky in the past, making incredible turnovers with one or two transactions, but these are also usually the traders that lose it all later. Good traders know their own risk appetite and are prepared to lose whatever they risk. However, learning about the risks, and more importantly, knowing how much of a risk-taker you are, could determine your success as a trader. Just like poker, there’s a lot of psychology involved – which is why the ones who reach the finals table are never the gamblers, and always the ones who know how to manage their risks.