Is Trading Basically Gambling?
The line between trading and gambling is so thin that it is a tendency for any novice trader, aspiring trader, or anyone who is ignorant on the subject to put it in the same basket as gambling. Why is this so? I attribute this uninformed decision of people unequivocally defining trading as just another form of gambling to most of the traits of trading that may make it seem like gambling. These are but are not limited to it being a game of chance, a high number of failures, the possibility of making a lot of money or losing it in a short time and in some cases obsession to it which some may call an addiction.
NUMBER OF FAILURES
Let us put some light on the high number of failures. There are many claims out there that 95 percent of retail traders fail at the craft. That is to say that they lose more money than they make through trading thus ultimately quit. This probably came from the cliché that “a high number of traders lose money in the markets” and people ended up putting any number they want on the number of failures. One person woke up and just stated 70 percent then another 80 and in no time we were at 95 percent with no research to back it up. I am not disputing the fact that a high number of traders fail but I am just saying that 95 is an overstretch of the number. Most of the extensive and proper research on the matter have come up with numbers much less than that. The one done by Investopedia came up with the conclusion that 32% of retail traders make more than they lose in the financial markets. This implies that 68% still lose more than they make through trading. This is still a high number for those with low-risk appetite but if we are being honest the same if not worse would apply to any other profession if there were no barriers to entry as the setup is in trading. In trading you basically have to just show that you are above a certain age, produce proof of identity and of residence and you are good to go. You can now trade all the instruments offered by your broker with the leverage you choose despite all your ignorance. Imagine if this same concept is applied to all other professions the disaster it could cause. Imagine if to become a neurosurgeon you just had to show up at the theatre without any education, a certain degree of intelligence or experience. How many brain operations would be a success? My guess is none. That is 100% failure. Imagine if to become a lawyer or judge you just had to show up at court without going to law school. Would the justice system function? Definitely no. See how these two cases made you feel cringey for a second. The same should apply to trading. Trading to someone who does not have enough education on risk management and leverage can become just another form of gambling. For a professional trader though, who knows exactly what he/she is dealing with and wants to do and has an edge, it can become a consistent source of money to live off of.
GAME OF CHANCE
The other characteristic that leads trading to being called just another form of gambling is it being a game of chance. The logic behind this is that when one places a trade, he is betting on the chance that the price is going to go in the direction that he has chosen, whether it is a buy or a sell. If he/she is long he/she is betting on the price going up and if he/she is short he/she is betting on the price going down. Then his risk (pips from entry point to the Stop Loss) becomes the wager of the bet. The reward (pips from entry point to the Take Profit) becomes the prize of the bet. Then the chances or odds of the bet are the different probabilities of the price going either up or down. This logic is actually not flawed if you do not look at it the right way. However, if we are to be consistent and use it in the same way on any business model you will notice that almost all of them will be classified as gambling. Even saving money becomes gambling! Because when one saves money, he is betting on the chance that his money will be the same value or more at a later time. His reward on the bet is the increase in value of the money. His risk is the possible decrease in the value of the money that he is saving. Therefore, saving money does have the three elements required for it to be classified as gambling which are wager, chance and the prize. Using the same line of thought, a miner also becomes a gambler. The wager of the miner is the amount of money he puts in the venture as the cost of doing his mining business. The chance of finding minerals becomes the chance of the bet. The possible prize of the bet will be the minerals that he might get at the end of his endeavour. The same principles we applied on the miner can also be applied to a buying and selling venture. See how this line of thought is flawed? Almost everything if not everything will end up being classified as gambling. It is not only about a game being a game of chance with possibilities of winning that makes a gamble a gamble. So, what then makes gambling what it is and differentiates it from other business models you may ask. For now, I will only give you a hint but will tell you the answer in depth at the end when I am done stressing on the points we mentioned before. The hint is the key difference between gambling and other games of chance lies in the odds.
The possibility of making a lot of money or losing money in a short time makes trading seem more like gambling probably more than the other traits. The fact that one can get to six figures in no time from a four-figure account or even blow a five-figure account in a short period of time makes trading look like a brother to gambling. This can be misleading to novice traders as they think that they are supposed to be rich in no time and without putting in any work hence end up treating it just like gambling. However, this is not the case. Allow me to walk you through a line of thought about how the business model can be a safer one. Way safer for it not to be categorised in the same boat as gambling. For the sake of progress let us talk in terms of percentages of accounts instead of the dollar values. The possibilities of how one can trade when one starts trading are limitless. I shall not delve much on the strategies though but rather on the risk to reward ratios which are key to how much one can make per trade and overall. If a trader chooses to risk 100 percent on one trade, that is their whole account, then it ends up being the same as gambling. This is because there is no solid risk management strategy which means in no time at all the account will be blown. This is definitely not the way that professional traders or banks trade at all. Because naturally it becomes a losing strategy in the long run because at one point or another every trader is supposed to lose a trade. How then can it become less of gambling you may ask? Here it becomes subjective and that is what makes trading difficult. However, for me anything above 5% of risk on one setup becomes a gamble because at this point rationality is lost as the strategy ends up coming to the hope that this setup will not be the losing one. The ability to absorb losses both mentally and financially is key in differentiating trading from gambling.
The last characteristic that may make trading seem like gambling is the fact that at times it may result in cases of obsession towards it. This however on its own cannot be a sufficient reason to pass the verdict of it being gambling. I see it more as an obsession with traders wanting to succeed rather than just wanting to strike luck on a single trade to become overnight millionaires. In my view the fact that even big institutions and banks such as Goldman Sachs and HSBC have been trading for as long as I remember in itself is satisfactory to show that the trading obsession is a good thing and not a destructive one because if it was not all these institutions would have collapsed way back in the day. What is also key to note is the fact that these banks do not participate in any form of gambling because they do know that in gambling no matter how good the research is, in the end it all lies not in the system of the gambler but rather pure luck. This is not something that any trader or bank looks for or hopes for. Traders simply look for systems with objective statistical edges and thus look to make profits in the long run.
There are characteristics that trading has that are not present in gambling thus differentiates the two. In gambling for instance, without the house charging fees it will always have a statistical advantage over the participants. Thus, the infamous quote, “the house always wins.” The odds in gambling are always set up in such a way that regardless of the strategy of the participants, the house will always end up taking more of their money than they will get in payouts. On the other hand, in trading money simply moves from the less informed participants to the informed ones. Many brokers however end up taking the opposite side of their clients rather than forwarding them to liquidity providers. The reputable ones do this without manipulating charts to their advantage though. This is what resulted in cases where FXCM, the biggest broker in the States then almost went bankrupt when the Swiss Bank removed the cap it had on the franc in 2015 which resulted in the broker having to pay its clients a lot of money.
The other trait that is present in trading that is not in gambling is the ability to have a winning strategy in the long run. Gambling ceases to be ”gambling” when there is a consistently winning strategy because naturally the games are rigged in such a way that rips off the gambler and puts money in the pockets of the house. A gambler rarely has arbitrage opportunities. On the other hand, arbitrage opportunities are constantly present and in numbers in trading as the goal of the reputable brokers is not to rip off the clients. However, spotting them requires not only skill but also experience which brings us back to the absence of barriers to entry. This is the one leading factor that leads to the high number of failures hence all the sceptics around trading.
The pattern that I have observed generally is that those that call trading gambling are very much those that know too little or nothing at all about it. It is not any coincidence that I have not yet come across a successful trader who calls trading gambling. As a conclusion thus it is only the ignorant who have no time or interest to research on the subject who call it just another form of gambling and skip on the subject. I am not trying to motivate anyone into picking trading as a career (It probably is one of the hardest and most stressful professions out there) but I simply want to shade light on the controversy around it in the less informed community. My main goal in writing this article in the first place is for people to recognise it as a professional career that needs a lot of work and time in training as well as when operating fully. It should not be viewed as just a way of getting a quick buck or just as a hobby. There are cheaper hobbies out there. If one is looking for a hobby, he/she rather choose photography instead. No pun intended.