A research paper published in 2015 came out with a very interesting finding. At times when a particularly high lottery prize was up for offer, trading volume decreased substantially in certain risk-on stocks. Apparently, a large subset of financial traders found that the jackpot served their purposes better than online trading channels.
The viewpoint of this group of traders – which equates financial trading with gambling – may be shared by more of us than we realize. In fact, anyone who feels they exert no practical control over the results of their trades – that the outcome is up in the air like the spin of a roulette wheel – isn’t really doing financial trading in the strict sense of the word. They may enjoy telling their friends about the “trades” and “deals” they’ve closed, but they may really be more at home in Las Vegas than in front of a trading screen.
When pandemic lockdowns restricted us to our homes for weeks at a time in 2020, online trading really took off among individuals who, until now, knew very little about the financial markets at all. In Europe, the proportion of daily trading done by retail traders increased from 2% in 2019 to almost 7% in mid-2020. In the USA, the percentage reached as high as 15% in September 2020. How did these new enthusiasts fare? On the whole, not wonderfully: About seven in ten ended up losing money.
What this statistic shows more than anything else is that the new recruits lacked a proper trading education. More exactly, they lacked the understanding of what online trading is. It’s a discipline and a skill, to be acquired in an ongoing process of self-education. It only seems like roulette from the perspective of outsiders, who don’t appreciate what’s going on behind the scenes. When the real traders are at work, every trade is carefully planned, calibrated, and carried out. Lots of research leads up to the opening of the deal, whether it’s on economic indicators, company management, or historical price data.
In this article, we’ll explain why the bread and butter of online financial trading is education. This is what makes it approachable and potentially fruitful for a large portion of the hitherto inexperienced. Indeed, trading represents an exciting opportunity for the large majority of us, who used to be barred from the activity in the old days, when large institutions dominated the field.
Emotional Decision-Making
A study made in April 2024 found that the five commonest mistakes made by online traders were: 1) lack of education or research, 2) emotional decision-making, 3) poor risk management, 4) overtrading, and 5) lack of a trading plan.
Skipping to number 2, we can certainly all identify with this problem. When money is on the line, it’s pretty hard to feel casual or indifferent toward the outcome of events. And, yes, it’s that sense of panic or euphoria that motivates us to make the more foolish decisions in our online trading. Yet, finding a way to address this issue wouldn’t necessarily take us out of the category of online gamblers. Many professional gamblers, particularly in the poker arena, are masters of their emotions and go about their “business” with a very cool and calm disposition indeed. This can’t be what distinguishes trading from gambling. Besides, is it really possible to eliminate the influence of your emotions from money matters?
Poor Risk Management
In the trading world, risk is managed with tools like stop loss orders, which automatically close your deal when certain price levels are reached, saving you from accumulating large losses. But, again, even if you do this, it won’t set you apart from the casino population. Expert gamblers manage their risk with the greatest of care. In horse racing, they spend hours poring over the bloodlines and performance history of the animals. When it comes to sports events, they look into player and team history with an exacting eye. Roulette players calculate their bet sizes precisely to account for potential losses before they happen.
Overtrading
Doubtlessly, this is a common mistake made by traders, but remedying this on its own won’t turn you into a great trader. The really successful gamblers know when the time has come to call it quits and go home with their earnings, but this doesn’t mean they’re not gamblers.
Lack of a Trading Plan
Most experienced traders would agree that, if you have no strategy in your online trading, it’s like captaining a ship without knowing your destination. But, once again, career gamblers appear not to suffer from this problem. On the contrary, their plans to beat the house are very specific and methodical.
The Core Issue
The first trading mistake mentioned in the research paper above – lack of education – in fact encapsulates the entire problem we outlined at the beginning of the article. It’s only someone who knows trading is a continuous cycle of learning and experience that can navigate the market waters effectively. The following analogy may help to illustrate.
An Olympic ping pong player puts all his energy into the first exchange with his opponent. He skids on the floor, scraping his knee, and even dives to reach a stray ball, bumping his head badly in the process. When he finally loses the point, he breaks down in tears, flinging away his bat in despair.
Most of us would wonder how such a competitor even made it into the Olympics. All the professionals know things have to be approached with patience, persistence, and strategy. It’s not a single point that matters, but the full count of seven games. The way to succeed is by steadily observing your opponent’s weaknesses and learning to take advantage of them.
It’s the same thing in online trading. Being successful in a single trade is simply not the goal. The goal is to apply your strategy as best you can in your first trade, and then to gather whatever lessons you can from the way things turned out. Maybe, after doing some reading, you’ll find an article dealing explicitly with your challenge and how to address it. Then, you go in and apply your revised strategy, following this with another “stock-taking” of what went wrong (or right) and how to deal with it. This goes on ad infinitum. All we have said until now is not meant for the traders who strive for extra credit. It’s simply the definition of online trading. Anyone who goes into their trades with the hope of running into a sudden, large windfall is, properly speaking, a gambler.
The Best Way to Self-Educate
As you may have experienced for yourself, learning goes swimmingly when you’re interested in the material. Thankfully, economics and the financial markets are very interesting phenomena, and one topic moves organically into the next. You’ll find that, the more you read, the more you want to find out about in greater detail. And there has never been more information so readily available than in our times, so you’ll never lack material. The internet is full of great stuff. All you have to do is distinguish between reputable sources and the more questionable ones.
The better online trading platforms are, these days, equipped with education centers to offer you clear, succinct answers to your questions. They also teach you to do technical analysis on your asset’s price history, which you can do on the platform itself, using their cutting-edge tools. This includes, for instance, making candlestick charts and plotting technical indicators on top of them. Tools like this are especially designed to help you perceive the long- and short-term price trends guiding your instrument. When you know your instrument is, for instance, at the threshold of a bull run, you know the time is right to open a “buy” deal on it.
These platforms also send – directly into your smartphone – live prices for your instruments and feed you a stream of relevant market news and analysis. All in all, they’re like very handy toolsets assembled for laborers in online trading.
Wrapping Things Up
Selecting the right online trading platform should be approached, at first, by eliminating the brokerages who are not regulated and licensed. Using these “brokers” puts your capital at a much greater risk. Try to also assess the reputation of your brokerage by looking around on the internet and reading customer reviews.
iFOREX is a leading CFD trading brokerage that’s been operating in the industry since its early days in the 1990s. They’re licensed and regulated and, in addition, make it their business to protect your personal information, which is guarded behind firewalls and SSL (secure socket layering). iFOREX clients have access to a generous education center and all the technical tools we’ve mentioned today, plus a lot more. Visit the iFOREX website to find the full array of CFD instruments you can trade on their platform, which includes shares, commodities, stock indices, cryptocurrencies, ETFs, and forex pairs.
