Wednesday, August 5, 2009

Is trading gambling?

As I was at the very beginnings of my trading endeavor, I had many of my friends saying something along these lines: “It can’t be done!”; “You are going to lose money.”; “It is gambling and nothing more!”. 

Five years later I am getting various questions from the beginners and one of the most frequently featured question in regards to trading is if, eventually, trading is being just another form of gambling. Through this Q&A involvement I’ve also realized that, somehow, from my experience, wives of successful people are the most skeptical about trading. 

Looking for outside of trading arena, I assume that trading might and probably does look like gambling. On another hand, by being a trader for half of a decade now, I know what the difference is between gambling and trading:

Gambling is gambling for gamblers only! So, when one steps in casino and when he/she places money on the table or in the machine, that’s when one becomes gamblerer. At the same time, Casino/House is involved in the process and the question I need to ask is: Do you consider Casino/House to be gambler too? I shall say no, because Casino/House has exactly calculated odds and mechanics of winning: Simply, every casino in the world will earn exactly 55% of every coin that one places on table or in the machine. Somewhere and sometimes, casino is going to earn every coin that gamblers or bored tourists donate and sometimes and somewhere casinos are going to pay somebody millions, but on average, over long run, they are going to earn 55 cents out of everything that was used on the tables or machines.

Trading is kind of similar. Our job is to turn ourselves into Casino/House. Sometimes, we are going to have big winners; on other occasions we are going to sustain big loses (within our stop-loss levels or even more in unfortunate black-swan events); while most of the time winners and losers will be average. Finally, when we add all of this together at the end of every day, week, month or year, one should make more than he/she lost. 

Logical follow-up question is how to become Casino/House?

It is very simple – We need to have trading system/approach with consistently positive expectancy; sound money management rules and we need to be able to consistently execute our trading and money management rules. If one would check Casino/House when they pay out, let’s imagine, one million rand jack pot and if one takes that single event and judge their business sustainability, then chances are exactly 100% that business will not be sustainable for longer period of time. The same is with trading - If one measures his/hers trading by looking at losing trades only, or after losing stint, as an example, of five trades, then one would guess that business is not sustainable anymore. What actually matters is to check your trading business after X number of trades and to understand if you are making money or not.

If one doesn’t know what he/she is doing, then we are talking about gambler in trading or, in deed, in any other field. Let me be free to even more stress my point - in life as such!

When/if you become casino, then trading is going to be easier.

Trade with trend.


ajax said...

Igor, thanks for your excellent comments.The mindset of the long distance runner,just doing the job day after day,no glamour, just tilt the odds in your favour and make money over time.

Alsi Trader said...

Thanks Ajax.

In full agreement with you:

Have system with positive expectancy, sound money management rules and discipline to stick with the system. Then, find a way to recognize when you system is not working anymore and have another system ready to kick in.

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