Many Traders Diagnosed with Lottery Syndrome

Here's the Cure

Trader lottery syndrome
John Lund, Getty Images

Lottery syndrome affects many new traders. It's the quest for a big gain. A gain that will set them off on the right foot, build their account quickly, or in a best case scenario, set them up for life. Day traders affected are usually looking for a big price spike/drop during the day, for which they just happen to have a position. Affected investors dream of that penny stock that explodes to $100 per share.

Such things happen; people do win lotteries. Yet the odds of it happening are remote. Here's why lottery syndrome is a problem in trading, how it manifests, and how to cure it.

Trader Lottery Syndrome - The Diagnosis

"This is going to be a home run trade."

"I feel good about this one, I am going to risk a bit more."(see Risk Spikes)

"Retirement, here we come!"

"This penny stock is poised to explode any time now"

"This pile of Iraqi Dinars currently worth $500 is going to pay for my retirement some day."

Such statements, or symptoms, help diagnose trader lottery syndrome. A more apt definition of the syndrome would be an inflated assessment of probability for a big pay off. The truth is, we don't know in advance what is going to happen--and we actually don't need to to make money (see Analysis Vs. Trading).

Some trades do have a higher probability of working out than others, but despite the odds any single trade could lose.

Those with lottery syndrome like to play low odds (sometimes unaware they are doing so) in an attempt to win big.

Trader Lottery Syndrome - How it Manifests

In the outside world, people buy lottery tickets and play slot machines, hoping a small bet will turn into a life changing win. In the financial markets people deposit small amounts of money into a trading account, and then typically bet large chunks of it in the hopes of hitting a few big winning trades.

Some forex brokers allow people to open a trading account with $100. In trading terms, that's not a lot of money ($500 or more is recommended for forex trading). That account could be grown using a risk-managed approach, but that is too slow for many people. Instead, they risk $10 or $20 per trade (that's 10% to 20% of a $100 account-- it's recommended traders only risk 1%), hoping to make a few hundred dollars quickly. Unfortunately, with this approach, only a few losing trades and the account is empty.

Lottery syndrome doesn't easily go away, though. If not cured (next section) those with lottery syndrome will just keep depositing and keep losing...thinking they are getting closer to a big pay off.

Even traders with large accounts can fall victim to Lottery Syndrome. The ego wants big trades, so smaller consistent winning trades are completely ignored.

If you do like going after big gains (everyone trades a differently) realize that you don't need to take on lots of risk to do so. This is explained in Big Rewards Don't Require Bid Risk.

Trader Lottery Syndrome - The Cure

Professional traders plan, adapt, plan, adapt endlessly. But this is hard work. It means constantly thinking ahead and strategizing.

It also means regularly accepting losses on trades that didn't work out (avoiding losses is a huge mistake). Lottery syndrome is the opposite of this winning approach. Instead of doing the constant work the trader simply hopes that what they have done already will work out.

Get lucky and a lottery may payoff. After all, someone does win on big price moves. Having Lottery Syndrome is like having blinders on, though. So focused on the big gain, the every day consistent gains aren't even seen as an option.

For anyone who wants to consider trading as income, look for "singles" and "doubles," not home runs.

Want to get rid of your Lottery Syndrome. Here's a rule of thumb.

  • Don't expect anything favorable to happen in a trade that doesn't occur regularly on the time frame you are viewing. Establish common tendencies and exploit those. In day trading, what is common will change daily, and what is common may even change during a single session.

    Here's an example. You pull up a stock chart and want to day trade it. It is trending currently, moving $0.10 to $0.13 in the trending direction and then pulling back $0.05 to $0.07 before trending again. Don't take this trade expecting the price to move $1 in a matter of minutes. That's not the tendency. Wait for the pullback, and then get in for a $0.08 or $0.09 gain (profit target)--which is even more conservative than the tendency. Based on where you get in during the pullback, set a stop loss based on the tendency of the pullbacks. If the price pulls back more than usual, that tells you something; you'll be stopped out and you accept the small loss. Then, watch and adapt to the new tendency (see Day Trading Forex in Two Hours or Less).

    If you wait for a $1 gain, in this specific situation, the price will likely reverse before it reaches your target. But by trading with the tendency your target is more likely to get hit. Throughout the day, day traders collect these smaller more probable gains over again. Over a number of trades, these smaller wins add up. Profits are locked in constantly. The account is grown so larger positions can be taken in a risk controlled way, and profits continue to build.

    The lottery syndrome trader, on the other hand, doesn't lock in regular profits and instead sees their account constantly dwindle. A big win may eventually come, but usually by then it is too late...the account capital is gone.

    Additionally, consider that Lottery syndrome is based on the fantasy that a sudden influx of money will improve life for the better. It may, but not always. Sudden Wealth Syndrome, as discussed on WebMD, actually can lead to heightened stress levels and detachment. Focus on growing your money in a risk controlled way, so you become comfortable with the income as it builds over time.

    Instant wealth is extremely rare, and when it strikes may not be all you expect it to be anyway. Enjoy trading. Improve your skill. Don't gamble with "lotteries."