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Gambling vs Trading (a comparison)

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When asked about the purpose of their most recent visit to a land-based casino, most people will casually respond that they were there to have a good time. Regardless of their game of choice, the vast majority of those who play games of chance are genuinely believing that entertainment is what drives them there. If you play long enough, gambling could turn into addiction but even if you stay on course, winning will become the main catalyst and only incentive.

In a nutshell, players spin the roulette wheel, shuffle the black Jack deck, deal the poker cards or press the buttons of slot games secretly, or openly hoping to win. There is nothing wrong in having some fun and if this hobby leads to occasional profits, then it is even better. Equally important is to realize that the games carry a certain house edge and they are crafted in such a way that being a long-term winner is impossible.

When it comes to poker and other games that are played against individuals rather than the house things change slightly, but variance and luck are still factors to take into account. Downswings are inevitable and in the absence of proper bankroll management, even the best players will eventually go bankrupt. Most of the aforementioned facts are common knowledge in the highly competitive environment of gambling, but they should still be highlighted before making any comparison to trading.

The question that many are asking themselves is whether trading is an entirely different business and whether luck can be rendered irrelevant in this activity. Whether we are talking about binary options trading, currency pairs, indices or other underlying assets, trading is governed by the same set of rules. It is a fact of life that most of the players who venture into this uncharted territory go bust and only a fraction of them stay afloat.

Similarities between trading and gambling.

1. The illusion of control and overestimation of skill and experience

Many traders are outraged when outsiders doubt their ability or even insinuate that successful trades were the result of luck rather than certain skills. On the other hand, they are quick to blame luck for all their misfortunes and whenever the market crushes their dreams, they claim that the game is rigged. If you spend enough time in this line of work you will probably hear many traders who are bitter and bicker about how they can’t compete with big companies that have access to vast resources.

You’d say gamblers know exactly what they get into when they enter a casino and they accept the fact that luck will decide their fate. What actually happens is that many of them turn from Dr. Jekyll into Mr Hyde the moment they step into the casino and get fully immersed into their game of choice. People who are otherwise reasonable outside casino games can no longer be reasoned with once they start playing.

They congratulate themselves for any minor victory and turn to despair whenever big losses occur, shifting from one state of mind to the other. Gamblers always find excuses for anything bad happening to them at the tables while taking praise when they succeed, even if luck is behind both events.

In a nutshell, both trading and gambling although influenced heavily by luck have a strange effect on the ones dwelling on these habits. They create the illusion of control when in fact the protagonist have limited, if any influence on the outcome of their action.

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2. Underestimating the magnitude of risks taken

As stated above, both professional gamblers and traders are convinced that they are in charge of their actions while the most reasonable ones accept that they can’t entirely control the outcome. When it comes to the risks taken, both old-fashioned gambling and cutting edge training relies on the same concepts and more or less on the same mechanics. If you want a high return on investment, you need to take a leap of faith and hope that an event with a low chance of success will come to pass.

Betting a lot of money on the ball to land on a roulette number will trigger a payout 35 times larger than the investment. A trader will be tempted to call that reckless, even though he might buy risky options based on rumors, market noise or even worse allegedly miraculous trading robots. The perspective differs, but at the core both actions are just as risky and to some extent reckless.

Another common mistake that is similar to both trading and gambling is that people are not happy with being marginal winners. If they are barely afloat and spend most of the time just a bit over the profitability line, they are tempted to regard this as a proof that they can be constant winners. The faulty assumption is that by increasing the stakes, the profits will follow the same ascending course.

This is only valid in theory, because when the stakes go higher, most people are paralyzed by fear and the prospect of losing clouds their judgment. Whether they choose to hedge against the risk and dig themselves further into a hole or don’t go all the way with their initial strategy, the outcome is the same.

Not following your initial plan is worse than following one that has its flaws, because you end up losing money without drawing any conclusion. Obviously, this doesn’t mean that you need to go down with the ship and burn through your entire bankroll just to prove a point, when you are clearly failing miserably.

3. Instant punishment or reward

Another similarity between gambling and trading is that they tend to generate immediate results, for better or worse. When you spin the roulette wheel, you know that in a matter of seconds you will be several times richer or you will lose the original bet. Professional gamblers, like poker players, have a broader horizon as they track performance over a longer period of time and accept the fact that they will be dealing with upswings and downswings. The problem is that only a few can see past the initial reward or punishment as the vast majority are solely concerned about finishing the current session with more money than they initially had.

This is virtually the same with trading, especially for day traders who collect their profits at the end of the day. Many lie to themselves, saying that they have a more ample strategy and that be the results are less important, but most of them religiously monitor results each evening. Binary options and Forex traders also find themselves in this category, while those who stick to traditional trading which implies the purchase and holding of stock are the exception to the rule.

4. A passion for systems and fundamental ideas

This is the part that I like the most as it is amusing and disheartening at the same time, because it has more to do with human nature than either trading or gambling. What makes it so interesting is that gamblers will dismiss the fancy theories of traders as nonsense and claim that the latter are simply wasting their time. They see no value in spending hours looking at tables, charts and endless strings of numbers or reading financial reports trying to come up with a coherent fundamental analysis.

By contrast, the traders look down on gamblers and can’t possibly believe how silly these are by believing that systems such as the Martingale, Labouchere, Paroli to name but a few, could actually work. For these guys who consider themselves mathematicians and astute observers of the stock market, gamblers look like little kids playing with coins. It is not the amount they spin that shatters any credibility, but the idea that it is possible to beat the house after being proven wrong for so many centuries.

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The funny thing about traders and gamblers is that they are absolutely correct when tagging the other group as dreamers, to use a euphemism. For outside observers, uninvolved in either training or gambling, the fallacies are more or less obvious. Even if they don’t know for a fact that complex trading strategies or rather straightforward gambling tactics don’t work, they have doubts based solely on common sense. The problem is that when you get fully absorbed in an activity that you expect to turn into a lifetime income you can no longer be realistic about your chances.

5. Leaving in denial and ignoring numbers

Another thing that is common to trading and gambling is that the people who actively pursue these activities are incredibly inventive. Even though they dwell on numbers and depend on them most of the time, they seem powerless in keeping accurate balance sheets. When asked by friends, relatives and even people who share their passion about how profitable they are, they always exaggerate.

Bragging about personal accomplishments is not something that only traders and gamblers do, but people in general. The difference is that these two categories take deception to the next level and lie to themselves as well, to the point that they can’t distinguish the truth. I frequently say that there are two categories of gamblers, those who lose and those who lie. Profitable winning streaks do happen to both, but on long term the overwhelming majority of risk takers lose more than they win.

6. Reliance on computer programs

Back in the day, gambling used to be fun and simple but nowadays there is a deluge of guides, books and computer programs allegedly helping people to boost profits. Roulette strategies have been around for as long as the game, while blackjack players didn’t discover card counting after watching the movie 21. What is new in this line of work is that the Internet led to an influx of computer programs and various materials aggressively promoted by scam artists.
When it comes to trading, the situation is even more worrisome as Forex robots, automated trading programs and countless guides populate the spam folders of both traders and not traders. The authors claim that anyone can make a fortune by spending a double-digit number on these miraculous apps and then sit back and wait for the money to come their way.

It is not a lie if you believe it, but let me tell you how things work in the real world. The only ones that make money are the ones selling the program, while the customers actually end up losing more than they would by playing themselves. It’s not necessary that the apps are aimed to cause losses, but when you have an allegedly miraculous software in your possession, you tend to grow bolder. People invest more money than they would normally do and are more likely to borrow if they happen to lose their bankroll.

Differences between trading and gambling

Don’t brace yourselves for six more subtitles as this section is just for paragraphs long.
Gambling can be fun if done properly, which means that you only invest the amount that you can afford to lose and never mix living expenses with casino money. The sooner you accept the fact that on the long run you will lose and consider this as a fee you pay for entertainment, the happier you will be and the less likely it will be for addiction to insinuate.

Poker players and those who compete against their peers can make money if they have outstanding discipline, a lot of patience, skill and ideally another source of income. The most important thing though is to choose your opponents wisely and always play against those weaker than you. There is no point in trying to prove anything to anyone, because if money is what you’re after, everything else is irrelevant.

By contrast, trading can never be entertaining because you always have more fun when winning than losing. Placing random orders and buying stock without proper research is not trading but gambling, so you need to take your time and go the whole 9 yards. Whether you use technical or fundamental analysis, the process will be time-consuming and sometimes exhausting, which removes fun from the equation.

While you can forget about having a good time trading, the upside is that the odds of winning improve as you gain experience. If you stay afloat long enough and have the discipline, time and money to trade without withdrawing the profits, your bankroll might just grow big enough to generate satisfaction. Then again, it is more likely to be among those 85% who lose than the 5% who are constant winners.

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