PUT TO BED: Trading VS GamblingIt’s a big debate that runs the financial market.
Is trading gambling?
Well I’m going to try put it to bed in just a few sentences.
There are two types of gambling.
Gambling by chance and total randomness like slot machines, lotteries, Bingo, Wheel of Fortune and flipping coins.
And strategic gambling which allows you elements of control of coming out with a probabilistic chance of winning.
I believe trading is a form of strategic gambling.
Let’s talk about the similarities between certain strategic gambling games and see how we can learn from them with trading.
Game #1: Trading and Poker: Skill, Strategy, and a Bit of Luck
In poker, each player gets a unique hand of cards.
To win, players must devise a strategy based on their understanding of the game, their observation of their opponents, and their willingness to take risks.
Players can choose to play, bet or fold.
The same principles apply to trading.
Traders have their ‘hand’ in the form of markets to choose to trade.
To yield profit, they must understand market trends, observe competitors’ behaviours, and manage risks.
In poker, one needs to know when to fold and when to bet aggressively.
In trading we have stop losses to get us out of the trade.
We have take profits to bank our wins.
We have volume choices of how much to buy or sell.
And we have the choice to stay out completely.
Poker also teaches the importance of emotional control and patience, which are crucial in trading, where emotional decisions can lead to significant losses.
Game #2: Trading and Roulette: Understanding Probabilities
Roulette is largely a game of chance where players bet on numbers, colours, or sets of numbers.
You choose whether you want to bet on red, black, even, odd, specific numbers and so on…
Although the outcomes are random, players can use probability to guide their decisions.
In trading, while certain market movements can’t be predicted with absolute certainty, we rely heavily on technical, fundamental, statistical analysis and probabilities to make trading decisions.
Trading, much like roulette, is where you need to diversify your positions and bets.
But instead of placing chips on certain numbers, we place deposits (margins) in the hopes of a probable outcome.
Game #3: Trading and Blackjack: Playing Against the Market (House)
Blackjack involves strategic decisions, where players decide to ‘hit’ or ‘stand’ based on their current hand and the dealer’s visible card.
The main goal is to try and get the cards we’re dealt to hit 21, be close to 21 or be closer to 21 than our opponent’s hand.
Bet too high past 21 and you burn.
In trading, technical analysis serves a similar purpose by predicting future market movements based on past data.
Bet too high with trading and you stand to lose a lot more.
And if you can’t count with Black Jack, then you have a much bigger disadvantage to the game.
If you don’t have strong and stringent money management principles, then good luck trying to maintain, preserve and protect your portfolio.
Game #4: Trading and Horse Racing: Know your horse!
Horse racing involves choosing the right horse based on its:
Form
Characteristics
Conditions of the race
Weather on the day
and other factors.
This is like trading. You need to understand each market you trade.
It has its own personality, form, movements, and style.
You also need to know which market is conducive for your trading portfolio.
And you need to choose the right stock or asset to trade based on its performance history, current market conditions, and other factors.
In horse racing, experienced bettors also diversify their bets across multiple races and horses to spread risk.
With trading we diversify our portfolios over different accounts, markets, sectors, instruments and types.
Game #5: Trading and Sports Betting: Predictive Analysis and Risk
Sports betting also works similar to trading.
You need to know how to analyse a team’s or player’s form, weather conditions, home and away records, and more to predict an outcome.
Whether it’s football, rugby or cricket – you need to know your team players, strategy and likelihood of who is to win what game.
Traders also conduct similar analyses, studying companies’ financial health, market trends, and technical indicators to predict market movements.
And as always, there are both risks that need to be calculated and managed for high probability successful outcomes.
So next time when someone tells you trading is just gambling. You tell them, they are right but it’s strategic gambling rather than gambling by chance.
