Last Updated on 7 April, 2022 by Samuelsson
Is Trading Like Gambling?
The day trading vs. gambling comparison has been on for a long time. So, you may have heard people say that traders are gamblers, and if your morals or religion forbids gambling, a lot of questions will be going through your head. Thus, we ask in this post: is trading gambling?
While people often say that trading is like gambling and, truly, both concepts do share some commonalities, trading is not gambling. And, here’s why: gambling is purely a game of luck, but long-term success in trading is never a result of mere luck because no one can be consistently lucky. Successful professional/career traders follow a proven strategy and are consistent. In fact, an experienced trader with a proven strategy is like the casino, not the gambler!
In this post, we will help you spot the difference between trading and gambling. We will discuss the topic under the following subheadings:
- Similarities between trading and gambling
- What’s the difference between trading and gambling?
- Is trading equal to gambling?
Similarities between trading and gambling
Just as with gambling, a trader, in each trade, puts money in the market in the form of a wager and hopes he wins money instead of losing it. In this instance, buying the United States Dollars or betting against the outcome of a football game isn’t that much different – you either win or lose. Certainly, there is no way to know the outcome of any particular trade, no matter how successful the strategy that identified that trade is.
A professional stock trader, as with a horse race punter, knows that each trade can either turn up a win or a loss (or in some cases, a breakeven). As a result, he uses a stop loss to limit his potential loss to a certain amount, just as the gambler stakes a known amount in each bet.
Also, what is known as a black swan event in trading — like when there is high-impact news, such as the Non-Farm Payroll (NFP), Earnings report, CPI report, etc., which can send the market into a volatile state — can also be seen in the gambling world. The equivalent of a black swan event is when your opponent has ‘four aces’ at the poker table; this can cause a lot of reactions.
Furthermore, both traders and gamblers are faced with lots of psychological effects in their pursuit of profits. Both a trader and gambler must learn how to deal with losses and also prepare for them so as not to over-trade or over-gamble because it is definitely bound to occur.
What’s the difference between trading and gambling?
While they share similarities, there are a lot of differences between trading and gambling. Here are some of them:
Experienced traders first find an edge in the market before they trade that market. An edge is a fairly consistent inefficiency in the market that presents a trader with an opportunity to make money from the market. This could be in the way the market behaves at a specific time of the day or after a certain event. A trader who spots that inefficiency takes advantage of it to benefit from the market. It gives him an edge over the market.
This is not the case with gambling. Gamblers just play their hands and hope they are lucky with their plays. In other words, gamblers depend on mere luck to make money from their stakes.
Having identified an edge in the market, an experienced trader develops a strategy around it. The strategy tells him when to enter and when to exit the market to take maximum advantage of the edge without exposing his trades to excess risks. That is to say, with a strategy, the trader knows the conditions that would be present in the market for his edge to be present. When the conditions are not there, the trader doesn’t enter a trade, and if he’s previously in a trade, he would exit.
Interestingly, the trader also backtests and front-tests his strategy to be sure it is profitable before committing real money into the market. Thus, unlike a gambler, a trader has some control over what he does when playing the market.
With a strategy, an experienced trader develops a plan, which serves as a guide. The plan tells him how to manage his capital to give him the best chance of being profitable in the long run. The trader already knows that, with his edge, over a series of many trades, he would make profits, even though some individual trades would end in a loss. In fact, there would be streaks of losses, so he manages his capital in such a way that those losses don’t take him out of the game.
A gambler doesn’t have things all planned out like this. In fact, he can’t because he never had an edge in the first place. He is blindly hoping on getting lucky. In gambling, the edge is with the casino or betting company.
Thus, in comparing trading to gambling, you can see that, with the type of control an experienced has, the trader is like the casino and not the gambler. It’s only an amateur retail trader who knows nothing about how the market works and trades blindly hoping to get lucky that can be compared to a gambler.
Is trading equal to gambling?
Of course, it’s not. Trading involves analyzing past data and using that data to predict the future outcome of a security’s price. As a trader, you have at your disposal trading tools that you can use to better analyze the market, making your trades outcome even better.
Trading involves the buying and selling of securities. Stock trading, for example, allows traders to profit from the market’s daily price fluctuations. In a competitive environment, companies are always on the lookout for the next innovation and breakthrough that will set them apart and ahead of their competition. This competitive nature of these companies leads to their stock price rising and falling, providing trading opportunities. Thus, a stock trader makes money when the conditions align to increase the likelihood of him making money from the market.
Gambling, on the other hand, is a game of pure luck. The edge is with the casino, and not the gambler, who will eventually lose out in the long run. Here we can see that the odds have always been against the gambler right before they placed their wager.
Money management is another crucial aspect that sets trading apart from gambling. As a professional trader, you won’t want to risk all your capital on just one trade but rather a percentage of it. In this way, you can control your losses while planning for great returns over the long run. Gamblers are set up to lose it all over time.
To summarize, here is why trading is not gambling: gambling is purely a game of luck, but long-term success in trading is never a result of mere luck because no one can be consistently lucky. Successful professional/career traders follow a proven strategy and are consistent. In fact, an experienced trader with a proven strategy is like the casino, not the gambler!
So, is day trading gambling? Well, that may be a question for untrained amateurs!