Is Trading Gambling?

Submitted by Marco on 2 April, 2008 - 09:03

Is Trading Gambling
Have you as a trader questioned whether your trading is a gambling operation or a business proposition? Find out if trading is gambling.

Is trading gambling? It’s a question that’s bound to pop in your mind if you’re an active trader in the markets. Trading seems like gambling. You risk a portion of your capital into this thing: this concept we call a market. You put in your money and your money can do one of three things: return you an increase in capital, return you the same amount or return you less. Very similar to putting in money into the slot machines and getting those returns isn’t it? So are traders gamblers or not? Let’s examine it.

This article is a slightly different treatment to the previous question if share trading is gambling and the conclusion of trading is gambling blog articles. You may also want to know that Trading is a Minus Sum Game and the house always wins.

This whole article prodding the question of trading gambling is about perspective. The answer lies within yourself and is all about how you see the question.

Let’s say you are a small time forex trader either trading mini-lots or small amounts of standard lots. (Actually that’s an understatement, with $10,000 and 100:1 leverage you can trade with $1 million exposure, but tiny with regard to the $2 trillion a day market) Now, because you are a retail trader you don’t have access to privileged market information or even a live Bloomberg box. (Although you can rely on Bloomberg TV which isn’t advisable for something so volatile). So is this trader a gambler? Well, the trader may well be a straight gambler and put the money on hunches and doesn’t have a trading plan or a money management system. But what if the trader had all those boxes ticked: he or she may have had a plan complete with an entry and exit strategy and a complete trading plan. They would be truly a professional trader. But they may also consider themselves gambling because: everything in life is a gamble; risking something in the hope of gaining something. Business startups risk their capital; students studying at university risk their time in the hope of landing that dream job.

So it depends on your perspective. Professional gamblers in casinos have systems. Forex traders have systems. Taking a chance on anything is a gamble. From starting a business to choosing a career. But in all choices, there is a portion of the decision that is certain and another portion that is uncertain. But in trading forex, equities, options and other derivatives: or even playing poker; in having a system it gives you an edge on the game and increases your probability of success. Just like when you choose to be a lawyer, you go to university to learn the system to be successful at it.

One could consider any type of trading or investing gambling, but the difference between participating in capital markets and going to some casino or buying lottery tickets, is that you can actually calculate your probability of winning and your expected payoff if you have a rule based system that has been practiced of a great enough period of time. Additionally, unlike casinos or lottery tickets, you don't necessarily have to lose all the money you put up. For example when playing blackjack when you buy into a hand, and that hand loses, you lose all you money. But in capital markets, you don't have to lose all the money you put up and can take "partial" losses on each "hand" you play.

Perspective. If you enter the market in the view of a gambler. You are simply gambling. If you enter the market as a trader: armed with technical/fundamental skills. You are trading.