Whenever I hear a trader announcing that he is folding up his hand and leaving the game because there is no money to be made in the markets, I remind him of the following, “As long as trades are being consummated and money is still flowing in and out of the markets, somewhere, someone’s making money. It might as well be you. Of course, if you quit the game, it certainly won’t be you.”

If you listen to people talking about winning the lottery and how impossible it is to win it, you hear a similar conversation. “You can’t win the lottery if you don’t buy a ticket.” That statement is true, but the situation is different in one very important respect. Entering the lottery is, indeed, gambling: the odds are in the millions (often the hundreds of millions) to one against your winning, and luck is the operating factor. But, trading is not gambling, or at least it shouldn’t be.

A professional trader is a highly trained and knowledgeable participant in the process. Even if each trade is a zero sum game in which one trader makes money and another loses money, the odds are, on average, even – which is a far sight better than the odds in the lottery. But, a trader’s knowledge, training, experience, and self-discipline are a set of factors that can significantly tilt the odds in each trade. Otherwise, it would not be possible for professional traders to consistently make a substantial living from their work.

When an inexperienced, untrained, undercapitalized, undisciplined trader, propelled by greed and fear, is on the one side of a trade and a highly disciplined professional trader is on the other side, it is the equivalent of two jockeys in a race in which the first jockey is riding an old nag and the second is riding a magnificent 3-year old sired by a Triple Crown winner. The odds are no longer even and no one would expect the old nag to win, nor would one expect the inexperienced trader to prevail.

What happens, however, when the field is filled with veteran jockeys riding the world’s most perfectly bred and well-trained thoroughbreds? Now, you are watching the Kentucky Derby. The race is going to be a nail-biter and the outcome is not certain. However, statistics have demonstrated that the odds in this race favor the horse that has previously won the most races. Experience wins out. Yes, there are upsets, as in the case of the famous race in which Man O’ War, the greatest racehorse of the 20th Century, was bested by a relative unknown named Upset (a word which meant, up to that time, “emotionally distressed”). But, that was a single race and Man O’ War’s only loss. The great equine had been emotionally distressed at the beginning of that race and when the race started, he was facing the field backwards: so much for the importance of psychology in racing (and trading)!

So, what does all this talk about horse racing and lotteries have to do with trading and making money? The point is that as long as there is a competition in which preparation will affect the outcome, someone is going to walk away with the prize and that person will be the one who is most prepared. For traders, this means that, regardless of how thin or volatile or flat the markets may be, there will be money to be made by the traders who have done the best job at preparing themselves for the competition.

And what kind of preparation will keep you in the race and improve your odds of making it to the winner’s circle? Here is what I tell my traders who want to finish first:

1) Get as much education as you can in the markets

2) Develop your discipline to its highest degree

3) Work on your psychology and resolve all unresolved personal and emotional issues

4) Develop and follow your money management religiously

5) Create, test, and follow the rules of your trading system or methodology with total

6) Ignore the roar of the crowd but cultivate your own cheering section

If you follow this strategy, as long as there are races to enter, you will stop worrying about the odds because you will have the confidence to win more of them than you will lose, making you the Man O’ War of the trading world. Copyright 2009

From “A Lesson A Day For Traders” – E-Book #2