Many people will dismiss trading as mere gambling. Let’s examine a definition of gambling (from dictionary.com): To bet on an uncertain outcome, to take a risk in the hope of gaining an advantage or benefit. No trader can know what the outcome of a trade will be before it is complete. All traders have losing trades, but that risk is weighed against the expectation of greater winning trades. So, how is trading any different from gambling?
Trading futures is a zero sum game – for every buyer of a contract there must be a seller. When a futures contract expires, effectively what happens is that the losers pay out to the winners. It is often quoted that 90% of traders lose, which leaves only 10% of traders as consistent winners. What, then, separates the winners from the losers?
I would suggest that the 90% of traders that lose in the markets are those for which trading is just another form of gambling whereas for the winning 10% it is a business. How can this be? A simple analogy is with a casino. The players in a casino are gambling but the casino is a business. Why? Because the casino has a positive expectancy on all of it’s games which means the players must have a negative expectancy. Take a simple bet on red or black in roulette. The casino will pay out even money but, with the addition of a zero (or 2 if your really unlucky!) means the probability of winning for the player is just 18/37 or 48.65%. So the expectancy for the player is:
(.4865 x 1)-((1-.4865) x 1) = -0.027.
In other words, for every dollar bet the player will lose 2.7 cents. As the casino is taking the other side of this bet then for every dollar bet they will win 2.7 cents. The more bets that are placed then the more the results will tend towards this expected outcome. From a casino’s point of view they need to make the games as quick as possible to encourage the player to place more bets. Of course, in the short term the player could get lucky and win a few bets – but in the long term the odds are always against them and they will lose.
How does this relate to trading? Simple – the winners have a system with positive expectancy. They are not gambling because the more trades they place the more likely they are to realise that positive edge, just as a casino realises it’s edge over the players over the long term.
Losing traders do not have any proven system or one that is flawed – they are simply betting on the market going up or down in the hope that they will benefit. Losing traders are merely gamblers who are using the markets as a casino.
So, trading is never gambling because a trader will have a plan with a positive expectancy and will realise that edge over a series of trades. Some trades will win, some trades will lose – but after enough trades the trader will come out ahead