15/08/2020
Gambling is not a financial problem, but an emotional problem that has financial consequences. In other words, gambling is traced backed to an emotional imbalance – your hormones, to be exact.
Let’s take a closer look. Gambling activates the brain’s reward system, just like co***ne does. The brain’s reward system is linked to the pleasure sections of the brain. The pleasure section of the brain releases a pleasure hormone into the body, called dopamine, which causes the trader to feel enjoyment and pleasure while he is making trades and taking risks. This causes the trader to trade more and more because he wants to feel more and more pleasure.
For example, when a trader makes a good profit, his emotions rocket sky high, causing him to feel pleasure; but extreme trading pleasure can lead to overtrading, thus mistakes. Allow me to explain. Gambling stimulates the brain’s reward system, much like co***ne, leading to addiction, thereby motivating the trader to seek more and more gambling behaviors, like overtrading. This causes the trader to illogically try to reach that same buzz, again and again, leading to bigger and riskier bets.
Now pay attention because this is where it gets interesting. When a trader often gambles, this continuous release of extreme dopamine can cause a trader to develop a ‘dopamine tolerance.’ This is when a trader’s brain has become so familiar to dopamine that it no longer produces the same buzz or that same happy feeling as it did initially.
But because by this point the trader’s brain is so conditioned with a buzz, it now craves more and more dopamine, and this causes the trader to gamble more and more.
In these cases, a trader will take more risks in the hope of stimulating the buzz that he felt initially. But he will ‘not’ get that same buzz because he has developed dopamine tolerance. And so, the trader will continue to crave gambling because when dopamine is reduced, it can lead the trader down the path to depression. Depression may then trigger fear, which may lead to anxiety. And this explains why gambling becomes an addiction in trading.
So, what’s the solution? The solution is to gain emotional stability so that you may balance your hormones. It’s all about controlling your emotions. For example, the brain cannot feel two emotions at the same time – the brain cannot feel happy and sad at the same time, or calm and stressed simultaneously, or high and low at the same time. This is because different emotions turn different parts of the brain on and off.
For example, when a trader is happy, he activates the part of the brain responsible for happiness, slowing down the part of the brain responsible for sadness. When a trader is calm, he activates the part of the brain responsible for calmness, slowing down the part of the brain responsible for fear. When relaxation is turned on, stress is turned off. When depression is turned on, joy is turned off, and on and on it goes.
Now let’s translate that to trading. When a trader gambles and feels pleasure, he activates the part of the brain responsible for pleasure, slowing down the part of the brain responsible for logical decision-making. In other words, when the mind is in pleasure mode, it is challenging for a trader to make sensible decisions about his trades. These two different brain parts cancel out one another, not 100 percent, but roughly 2/3.
In other words, it is extremely difficult to feel pleasure and make logical decisions at the same time. In most cases, it’s either one or the other. Therefore, when it comes to trading, you must maintain emotional stability so that your emotions do not unwillingly turn various parts of your brain on and off; dragging you through the market in different directions like a lost puppy. Strictly speaking, you must be the one who is in control. You must decide when you will operate via the pleasure part of the brain and when via the logical thinking part of the brain. And so, your first step to overcome gambling in trading is to master your emotions. If assistance is required to do so, stay tuned because my trading psychology course and one-on-one sessions are on the horizon.
Another important aspect of gambling that I would like to share with you is learning to tilt the odds in your favour. What do I mean by tilt the odds in your favour? Well, when a trader gambles, he has a negative expected return, but when he trades statistically and skillfully, he can have a positive expected return, over the long run. Therefore, to avoid gambling, a trader must make trades that have a positive expected value.
Allow me to explain using a Blackjack example. The object of the casino game, Blackjack is to get a hand with a value as close to 21 as possible without going over 21. A hand that goes over 21 is a bust, whether you are a player or a dealer. And so, to win the hand you are dealt, your total must be higher than that of the dealer, but not greater than 21. Now, in Blackjack, the number cards have a value equal to their number, and all the picture cards (Jacks, Queens, and Kings) are worth 10. Aces, however, can be worth either 11 or 1, whichever is more beneficial to the person holding the hand. So, for example, a hand with an Ace and an Eight is worth 19 (in this case, the Ace is valued at 11). A hand with an Ace, an Eight, and a Four is worth 13 (in this case, the Ace is valued at 1 because if it were valued at 11, the hand would bust, and the dealer would win.
However, in Blackjack, the odds favor the house. That means that a casino that deals thousands of hands per day won’t win all the time, but they will over the long run. For this reason, Blackjack is a gamble because the expected value of playing the game is negative. However, there are ways to play Blackjack without gambling. For example, if the dealer has a six and a 4 (=10) and you the player has a six and a five (=11), then it is not a gamble to doubling your bet and only take one more card. This is because, the odds of you winning are in your favor because the six and 4 that the dealer holds are a terrible card, and the 6+5 that you hold has a good chance of turning in to 21 if you draw a card that has a value of 10, considering there are many cards of that value left in the deck.
In other words, your hand has a positive expected value. So, within a gambling game like Blackjack there are times where the odds of the player winning the dealer go up enough to favor the player, making the game one where the expected value is positive. At this point, the game is no longer a gamble because the player should make money.
Now let’s translate that to trading: If the expected value is negative, you are gambling. If the expected value is positive, it’s not a gamble. Therefore, always ask yourself the following question: ‘Do you know the expected value of the trade you are about to make?’ Because without knowledge and trading strategies that you have tested repeatedly over the long run, you cannot possibly measure the expected value of a trade, which means any approach you take is a gamble. And so, when trading is done statistically and skillfully, you can have a positive expected return over the long run. And this is how to tilt the odds in your favor.