How many times have you heard someone say “ trading the stock market is gambling at the highest level”...or something to that effect? Trading and Gambling are NOT the same… if you have a strategy. Trading encompasses having a defined edge that is calculated...gambling is throwing money at Lady Luck and expecting that she’ll grace you with good fortunes...the two are not the same!
Trading and gambling are two terms that elicit a wide range of reactions from the general public. It can, in some cases, invoke rage in a professional trader because pro traders know that trading and gambling are very different. I really can't stress this enough: trading and gambling are not the same...not even close! Profession Traders do not like being placed in the same category as gamblers. Pro Traders have an edge in the market that works well based on probabilities. Gamblers through shit at the wall to see what sticks… Sidenote: I do want to recognize professional “gamblers”, those pros also use probabilities to their advantage...some card players for example see their craft as akin to trading...which is something I understand.
Think about this, Traders that gamble can be identified by their notable lack of technical analysis and strategy alongside their addiction to quick returns… There is no edge, no base case to trade and risk management is something that is also NOT part of the equation!
You might be asking yourself…” what is the difference between gambling and trading” well...allow me some room to shed some light into the difference.
Gambling vs Trading
Gambling involves staking on the occurrence of an event that has an uncertain outcome for winning. For an action to be considered as gambling, three prerequisites must be present; the stake, the risk involved and the prize to be obtained upon the occurrence of the event.... Trading on the other hand, involves the buying and selling of financial instruments like, stocks, bonds, derivatives amongst others. There are several types of trading such as high-frequency trading, day trading, etc. each of which has its pros and cons.
Now there are historical similarities with gambling and trading BUT they’re wildly different at their core...for example: Gambling has existed since records began. Early gambling involved six-sided die in Mesopotamia in 3000 BC. Around the 9th century, playing cards made their entrance, giving birth to the modern card games we know today. Over the years, gambling has taken several shapes and forms such as sports betting, parimutuel betting, and the gamut of casino bets. Meanwhile, the trading of financial instruments began in the 17th century after merchants banded together to form joint-stock companies. In 1602, the Dutch East India Co. issued the first recorded paper shares, allowing for the trading of stocks. This revolutionary concept spread through the world, leading to the creation of exchanges such as the London Stock Exchange which was founded in 1773.
What do the two approaches to winning untold riches share? Clearly there are core similarities between the concepts of gambling and trading, with that said A key similarity between them has to do with the underlying psychological patterns of the two concepts...and that is truly the only thing that Gambling and Trading share.
Despite the similarities between trading and gambling, there exist some marked differences between the concepts. Most profound is the fact that gambling automatically creates a negative expected value. This means that in the long term, the casino or bookmaker (the house) will always win in the end even though they may lose some games. This scenario is termed as the negative expected value.
In trading, the use of a tested and proven strategy has the potential to tilt the scales from a negative expected value to a positive expected value. This is why some traders in financial instruments have been able to make consistent profits over a given period. The opportunity to create a positive expected value through the use of trading strategies distinguishes trading from gambling.
The truth of the matter is this...Trading and Gambling are DIFFERENT! It’s that simple. There are similarities, but principally speaking, they are different…
The bottomline is this: Your obsession with money is what prevents you from making any. Money is surely the prime motivator for getting involved in the market. Nothing wrong with that. But at the same time, you have got to understand that obsessing over money will only spoil your performance. So, size your trades correctly (keep it small at the beginning) to keep strong emotions in check, and play the long-term game, trade a well tested and proven edge. Follow the market's lead and make sure that everything you do is calculated in your favor!
Sun Tzu once said “The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. He will win who knows when to fight and when not to fight.”
Trade from a position of power...don’t gamble. Don't throw good money on a hunch or a meritless tip. Have a structured edge that has a proven track record of success.
Happy Trading Traders…
-Julian Lewis
Options Trader and Trading Coach
