Trading vs Gambling – Is there a Difference?

Put a trader in a group of non-traders and the conversation will inevitably turn to gambling.   At a recent family gathering I was asked about my share trading by an interested (or polite) family member, to which I responded with my usual cheery, ‘Good thanks!”

I had just mentioned that we were planning on selling our house and using the money to trade with, when a bystander with good hearing said rather loudly ‘Put it on Black!

These situations come up rather a lot; in fact some of my closest friends have expressed their thought that in the stock market it’s all luck and pretty much a 50/50 bet.  And for them, it probably would be.  Meanwhile I quietly bit my knuckle (hard) to stop myself from climbing a-top my soap box.  Because it was a dinner party, after all.

It seems the general population (in particular men in their forties on grand final day) don’t seem to consider a few quite important points, including but not limited to the fact that –

1.      It is highly offensive to be considered a gambler, particularly when you’ve just said you’re selling your house for funds.

2.      As traders we might have a slightly better idea of how the markets work than they do.

3.      A ‘girl’ in her extremely early thirties could have any knowledge at all of things they themselves don’t understand.

So, what is the difference between Trading and Gambling?

The difference between trading and gambling is, for me, enormous.  But I must admit that for a lot of ‘traders’ (or ‘speculators’ which is probably more accurate) there really isn’t any difference at all.  Even though I didn’t realize at the time, I started out as a share market gambler.  Now, however, I am not. To me, these are the differences –

·        A gambler is in it for quick bucks.  A Trader knows that profits often take time.

·        A gambler is caught up in the excitement.  A Trader knows that the job is boring, repetitive and mundane.

·        A gambler has the odds against him.  A Trader has a back tested edge that, over time, will consistently win.

·        A gambler focuses on the potential for winning, with no concept of risk.  A Trader focuses on the risk before anything, knowing profit will come as an afterthought.

If you are involved in the stock market, does your trading style sound more like that of a gambler, or a trader?   You might be surprised!

Quotes from successful traders

·        The key to trading success is emotional discipline. Making money has nothing to do with intelligence.

·        The big money is made by the sitting and the waiting — not the thinking. Wait until all the factors are in your favor before making the trade. (Jesse Livermore)

·        It’s not the mathematical skill that’s critical to winning; it’s the discipline of being able to stick to the system.

·        When you really believe that trading is simply a probability game, concepts like right and wrong or win or lose no longer have the same significance

·        A successful trader is rational, analytical, able to control emotions, practical, and profit oriented. (Monroe Trout)

Amateur Traders Vs Professional Traders

“A trader is the weakest link of any trading system” (Alexander Elder)

During one of the trading Seminar a student asked the following

“After 4 years of winning and losing hundreds of trades and blowing out several accounts both demo and live, trying different systems, experimenting with many strategies, I am still unable to achieve my trading goals and become a consistent profitable trader. I wonder why I am taking two-step forward one step backward and one step forward two-step backward and pretty much in league of majority of traders who are struggling to make consistent profit day in day out.

 As this problem is faced by many traders I decided write an article on this to find out reasons for failure for aspiring traders so as to kick start their trading career with a bang.

The most important reason for failure lies in my trading approach. Most of traders still react on emotion, fear & greed  and they need to change the way they think and get rid of this herd mentality, otherwise traders won’t be able to become profitable trader, no matter how hard they try.

“If you want to have a better performance than the crowd, you must do things differently from the crowd” (Sir John Templeton)

Professional traders think different from rest of the crowd majority of the time and that is why they are consistently profitable over longer period. Lot of these traders have started with small capital and made big fortunes by trading consistently year after year. Although their trading style and system is different from each other, some are technical traders; some are fundamental traders and some mixture of both.

Patience & Discipline

Amateur Traders are not sufficiently selective when entering trades. When they see volatile price movements, they become impatient and enter trades in middle of nowhere based on emotion, fear & greed rather than waiting for their system to give a buy/sell signal according to their trade plan. They want to be part of market action, as soon as they open their charts and see volatile price movements. They don’t think in terms of probabilities rather they give too much emphasis to an individual trade. They fear that if they don’t place an order instantly they might lose a golden opportunity to make money and when they finally place a trade, majority of the time it’s too late and they fall on trap to professional traders and enter at a level where these professionals are exiting their positions and as a result the market retrace and take out amateur traders stop-loss.

Professional Traders understand importance of patience and discipline in this business. They stick to their trade plan and don’t panic when they see volatile price movements. They understand that there is no place for emotion, fear & greed in trading. They know their edge and understand that if they stick to their system and follow their trade plan they would be profitable in the long run. They know that price doesn’t move up or down in a straight line and that after every impulsive move there would be a corrective move to entice more buyers/sellers and they don’t need to jump in the middle of a fast moving train. Rather they are looking for an opportunity to buy/sell at a discounted price (wholesale price) to get a better risk to reward ratio on majority of their trades. They assess their success or failure based on series of trades rather than an individual trade. They think in terms of probabilities and fully understand that there is random distribution between winners and losers. As such they don’t get upset if the miss out on a trade or have couple of losses nor they get excited after few winners