Most games are played in a controlled environment.
The rules, opportunities and threats are fixed, and known to all players.
In a poker game for example, we know in advance that there are 52 cards in the deck, divided into 4 suits with 13 cards per suit. We also know the number of opponents we’re playing against, and who they are.
So whenever a card is revealed on the table, we can calculate the probability of the next card to be revealed, and estimate the odds of having a winning hand.
But the game of trading doesn’t work like that. It’s played in a variable (i.e. non-fixed) environment.
In trading, you’re never sure of who you’re playing against, or the types of ways the market can move up, down or sideways.
Practically speaking, the possibilities are infinite.
So one of the reasons why people struggle with trading is because they approach it in the same manner as they would any other normal game.
They don’t realize that the game of trading works differently.
The Purpose Of Trading
The most practical purpose of trading is – no prizes for guessing – to make money.
But what many traders fail to recognize, is that they can only make money if they can stay in the game.
If you get taken out of the game, you can’t make money.
On the surface, this may seem too obvious to mention.
But you see… to most retail traders, “staying alive” is a mere side note, not an actual goal.
And I’d like you to consider “staying alive” to be the most important goal for traders. Not making money.
Let me explain.
What We Can Control vs. What We Can’t Control
The various aspects of trading can be split into two categories: things we know (and can control), and things we don’t know (and can’t control).
For example, we don’t know in advance where the market will move. We can’t control market prices, and there’s no way to know for sure where the market is headed.
We also don’t know who we’re effectively trading against, or when they’ll take action.
Compare this with poker, where the cards in a deck, number of opponents and their seating arrangements are fixed and known in advance. Most other games operate in a similar manner.
The only thing we know for sure as traders, is how much we’re risking on each trade we take. We can choose the amount of capital we lose when we’re wrong.
In other words, we can control how long we stay in the trading game.
This, above all else, is the number one job of profitable traders.
Why Amateur Traders Hate Risk Control
It may seem strange, but a profitable trader’s first line of business is not to make money.
This usually falls on deaf ears because new traders come to the market just wanting to make money, and overlook the more important goal of staying in the game.
After all, risk control is a boring topic… and nobody wants to entertain the idea of choosing how much to lose.
Thinking about how much to win is so much more fun and exciting.
The problem is that there’s no way to know (or control) how much we can win. That’s up to the market, not us.
We can only know (and control) how much we’d lose if we’re wrong.
In preparing and protecting against excessive losses, we can survive long enough to enjoy the coming profits.
The longer we stay in the game, the higher our chances of our trading edge working for us.