Why Do Trading Contests Reward Risk Over Skill?
Introduction
Trading contests have become an exciting way for traders to showcase their abilities, test strategies, and compete for prizes. These competitions attract participants from all levels—ranging from novice traders to experienced professionals. However, one recurring theme among many trading contests is that winners often achieve astronomical returns, sometimes exceeding 1000% in just a short period.
This raises an important question: Are these contests truly a test of skill, or do they merely reward those who take the biggest risks?
Many frustrated traders feel that trading contests encourage unrealistic strategies that wouldn’t be viable in real-world trading. Contest winners often deploy highly aggressive tactics that would likely lead to account blowups in actual trading environments. This brings up the luck vs. skill debate in trading contests and raises concerns about whether these competitions provide a fair measure of trading ability.
In this article, we’ll explore why trading contests tend to reward risk over skill, examine the role of luck, and discuss how traders can compete smarter without reckless gambling.
How Trading Contests Are Structured
To understand why high-risk strategies dominate trading contests, let’s first break down how these contests are typically structured:
- Fixed Timeframe: Most contests last anywhere from a few days to a few weeks. This limited duration forces participants to aim for the highest possible returns quickly, rather than adopting sustainable, long-term trading strategies.
- Profit-Based Ranking: Winners are usually ranked based on percentage returns, meaning the trader who generates the highest gains in the given timeframe wins.
- No Drawdown Considerations: In most contests, there’s no penalty for account blow-ups. A participant can take extreme risks, lose everything, and still re-enter another contest without any real consequences.
- Demo vs. Real Accounts: Some contests are run on demo accounts, which removes the psychological factor of losing real money. In such cases, traders may be even more reckless than if they were trading real funds.
- Leverage & Position Sizing: Trading contests usually allow full leverage, enabling traders to take positions far larger than what they would typically take in real trading.
Why Trading Contests Reward Risk Over Skill
The nature of trading contests incentivizes high-risk behavior for several reasons:
1. Time Constraints Encourage Aggressive Trading
A real-world skilled trader typically focuses on capital preservation, risk management, and consistent long-term profitability. However, in a trading contest with a short duration, the only goal is to maximize returns in a compressed timeframe.
To illustrate this, imagine two traders in a one-week contest:
- Trader A follows a disciplined, risk-managed strategy and generates a 10% return.
- Trader B takes large, leveraged bets and manages to generate a 200% return.
Even though Trader A’s strategy is more sustainable, they have no chance of winning because Trader B’s reckless approach yielded higher returns. Since trading contests are judged solely on performance over a short window, risk-taking is rewarded over consistency.
2. The "All or Nothing" Mindset
Since most trading contests only recognize the top few traders, participants have no incentive to play it safe. In real trading, risk management is crucial for long-term success. However, in a contest setting, a trader might think:
"If I go all in and win, I’ll get a huge reward. If I lose, I’ll just try again in the next contest."
This is known as the risk-seeking bias, where traders engage in behaviors they wouldn’t normally consider in real markets.
3. No Consequences for Losses
In real trading, losing too much capital means you can no longer trade. However, in a contest, traders can take extreme risks without facing long-term consequences. This encourages:
- Overleveraging: Using maximum available leverage to amplify gains.
- Martingale Strategies: Increasing position sizes after losses to recover quickly.
- Excessive Trading: Making rapid, high-volume trades just to chase big moves.
Since there is no financial downside to blowing up an account in a contest, traders are more likely to gamble.
4. Luck Plays a Bigger Role in Short-Term Trading
The skill vs. luck debate in trading is a complex one. Skilled traders rely on analysis, discipline, and proper risk management to generate consistent profits over time. However, in the short term, luck can play a significant role in trading outcomes.
A trader who takes a high-leverage position on a volatile stock or currency pair may get lucky and double their account in a single trade. Does that mean they have skill? Not necessarily. If that same trader repeated the strategy multiple times in a real-world setting, they would likely experience catastrophic losses.
Case Study: Financial Times Stock-Picking Contest
A great example of how risk-taking is rewarded in trading contests is the Financial Times stock-picking competition. Participants select stocks they believe will generate the highest returns within a fixed period.
Historically, the winners of these contests often pick highly volatile, speculative stocks that experience massive price swings. This reinforces the idea that short-term contests favor risky bets rather than well-researched, risk-managed investments.
This is why professional fund managers and hedge funds often underperform in such contests. Their strategies are built for long-term, stable returns, not for taking outsized risks to win a temporary competition.
How to Compete Smarter Without Reckless Gambling
If you want to participate in trading contests but avoid reckless gambling, consider these strategies:
1. Optimize Risk-Reward Ratio
Rather than going all in on a single trade, look for opportunities with a strong risk-reward profile. Aim for setups where the potential reward outweighs the risk by at least 2:1 or higher.
2. Use Controlled Leverage
While using leverage can enhance returns, it can also wipe out an account quickly. Instead of maximizing leverage, use it strategically—only on high-probability setups.
3. Focus on Volatility
Volatile assets move faster and create opportunities for higher gains. Trading in markets like forex, crypto, and small-cap stocks can help generate strong returns while still managing risk.
4. Implement a Tactical Scaling Strategy
Instead of betting everything on one trade, scale into positions gradually. This allows you to participate in market moves while minimizing downside risks.
5. Choose the Right Contests
Some trading contests focus on risk-adjusted returns or consistency rather than just the highest percentage gain. Look for competitions that reward good trading behavior rather than reckless speculation.
For those interested in joining trading contests that provide a more balanced approach, check out Crystal Ball Markets’ Trading Contests. They offer both free and paid trading contests where traders can compete based on strategy rather than pure risk-taking.
Conclusion
Trading contests are exciting, but they tend to favor risk-takers over skilled traders. Due to short timeframes, profit-based rankings, and the absence of real-world consequences, many contests become more about gambling than true trading mastery.
While some winners may genuinely possess skill, many victories are the result of high-risk bets that wouldn’t be sustainable in real trading. This doesn’t mean trading contests are useless—it simply means participants should be aware of their limitations and approach them strategically.
If you’re looking to compete smartly, focus on volatility, control leverage, and optimize risk-reward ratios. By balancing risk with skill, traders can participate in contests effectively without falling into the trap of reckless gambling.