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Traders always want to tell themselves that what they are doing isn’t gambling and that, because you can have a “strategy,” trading is a safer way to make a living. This is simply not true but it doesn’t really matter either.
Let me first explain the term “gambling.” Gambling just describes an activity where one places a bet on an event with an uncertain outcome, wagering something of value. If trading doesn’t fit this definition 100%, I don’t know what does.
In general, as a trader, you risk money (where the exact amount isn’t even predefined on the start – unlike other games of chance like blackjack) on an uncertain event (the movement of a financial instrument which has unlimited uncertain outcomes) with the goal to make more money (how much you don’t even know beforehand).
What Is an Edge?
An edge is something, a skill or a method, that allows you to tip the odds in your favor – usually just by a tiny bit. An edge makes trading, potentially, less risky because the expectancy is improved.
Being able to read price to time and manage trades can be a part of an edge. Emotional stability, discipline and having a long-term mindset, understanding how to manage risk and deal with variance, being able to work extremely hard, and being passionate are all parts of an edge as well. However, even the best edge will not remove the risk and the uncertainty.
In trading, having an edge will not guarantee anything. Even worse, unlike other games of chance in which the possible outcomes are predefined, there are only so many numbers in a roulette wheel or cards in a deck. In trading we are exposed to “black swan events” which can hit completely unexpectedly with outcomes that no one can plan for in advance. The ways and possibilities of how financial assets can move are limitless.
An edge is an important thing to have but it doesn’t make trading less of a gambling activity.
Your Whole Life is a Gamble
The good news is that gambling is totally OK. You should not get too hung up on this term or the negative connotations that come with it.
All our lives, we are gambling – not always by directly wagering money initially, but usually by betting something of value, often our time, for something that we hope will put us in a better spot later on.
When we pick our subject in college, we exchange a few years of our life and eliminate lots of other opportunities and possibilities in the future just because we think that this subject will lead to a profession that we will enjoy and bring us enough income to live a good life. Not everyone who leaves college or university will like their job, though, let alone find a good job in the first place. We exchange many years of our life for studies where we don’t even know the odds of a favorable outcome. Our edge? Consulting friends and family, googling for college rankings and listening to ourselves.
When we choose a job, we, again, exchange our time and we say no to other job offers and opportunities. We then hope that the company we choose will exist long enough, provide us with a good salary, fair promotion suspects, decent retirement plans and friendly bosses and co-workers. But we have no way of knowing that. Although living the 9-5 job is always seen as the “safe” way, nothing is guaranteed and we are acting on hopes and with a lot of uncertainty.
Entrepreneurs and shop owners also gamble. They provide a service, where they sell their time and resources, or offer a product, in which they have to invest money first. They hope that potential customers will value it so much that they can turn a profit. However, the outcome is uncertain and the wager is either time or money (mostly both). The edge? Research, personal skills, hard work, endurance and the need for good sales and marketing expertise.
When we buy a house and take a credit, we gamble that our job will allow us to pay off the mortgage. We hope that our marriage holds, that children will follow to fill the house and that the city and environment will remain livable. Can we know any of that? Of course not, but we still take the risk because we believe that the odds are good enough and the upside is worth it.
When we choose a significant other, we hope that the relationship will last for a long time, have a companion that we can grow old with and support us during hardships and old age. With a marriage we are also invested financially in a big way. Seeing the high divorce rate and the people who aren’t fully happy, this seems like a high-risk bet, but many people still make it.
Trading and Gambling
I could probably go on forever but I think you get the point. We gamble all our lives. We have to accept that trading is one of the purest forms of gambling.
You have to accept that you are in an activity where the odds are not necessarily in your favor at all times and that the unique characteristics of trading make it essential that you have good protection and risk control mechanisms.
Good vs. Bad Bets in Trading and Gambling
Let me conclude by saying that taking risks and gambling is not something you need to avoid. If the upside seems good enough for you so that you can live with the negative outcome as well, go for it by all means. Of course, there are things and bets where the odds will always be against us, or where the downside is so huge that it can’t make up for the upside, but here you need some common sense…
When it comes to trading, here are reasons for “bad bets” and “bad gambling” where the odds are not in your favor and a favorable outcome is unlikely or impossible:
- A trader who keeps changing his trading system frequently
- A trader without a structure, not knowing when to trade and when to sit out
- A trader who does not adhere to risk-management principles
- A trader who cuts his winners too short and lets losses run
- An impulsive trader who doesn’t have discipline
Taking (calculated) risks is what makes life fun and interesting and it is what makes trading potentially profitable. However, most traders are only dabbling around, engaging in bets and trades where they have no edge.
The saying that “not taking any risks is the greatest risk” is so true. Even if you don’t realize it and you might think that you are going the “safe” way, there are always opportunity costs and you might be wagering your time – which, after all, is our most precious asset.