“The market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!”” – Warren Buffett
The difference between trading and gambling isn’t as obvious as it was before. The rise of the internet has made online financial trading more accessible to people from all walks of life, including those with little-to-no background in the financial markets. The all-or-nothing mentality that some traders have adopted, combined with their speculative approach to the financial markets, has blurred the lines between trading and gambling. Unfortunately for them, trading and gambling are one in the same, regardless of their intention.
For those of us who rely on strategy, proven investing principles and technical and fundamental analysis, trading is nothing like gambling. Below are five important differences between the two.
- Gamblers own nothing, whereas trading implies ownership
When you gamble at a casino, you own nothing. You are relying on a game of chance in order to win money or some other prize. This is in stark contrast to trading, where you own an underlying financial asset, such as a stock, index fund, base currency or commodity. You buy a financial asset with the intention of selling it at a higher price at some point in the future. If the price drops, you still own the asset, although it is less valuable than it was before.
- Gambling is a game of chance, whereas trading requires strategy
Although many gamblers like to talk about “proven strategies” for success, these don’t actually exist. All forms of gambling involve a game of chance, where the mathematical odds are stacked against the gambler. When gambling, the probability of losing your money is greater than the probability of selling a financial asset at a higher price than you sell it. When you gamble, the higher probability of losing is already factored into the equation, leaving you at a much higher risk of losing. Although the probability of losing is still relatively high in the financial markets, the underlying price of a financial asset is determined by supply and demand, among other factors. This makes strategy far more important in trading than in gambling.
- Trading is based on research, gambling is not
Traders who approach the financial markets seriously undertake thorough research before taking on any position. They analyze past price action to determine future prices and learn as much as they can about the asset they are trading. In gambling, no amount of prior research is going to help you win. The outcome cannot be predicted based on prior games or attempts; rather, the mathematical odds are stacked against the gambler each time. This is especially the case in casino gambling, where the “house” has a mathematical advantage over the gambler every time.[1]
- Gambling is more time-bound than trading
As a trader, you can access the financial market at various timeframes. You can hold a financial asset over many years or trade hourly, daily or even weekly. In the case of options, you may have several months before your contract expires, allowing you to pick an optimal time for selling your financial asset. In this sense, trading can be time-rewarding, allowing you to earn more based on how long you hold a particular trade. Gambling, on the other hand, is much more time-bound. With gambling, your opportunity for profit is over once the game or hand has ended.[2]
- Trading allows for risk management, gambling does not
One of the biggest differences between trading and gambling involves risk.[3] Risk management – the set of practices that mitigate or eliminate uncertainty from the decision-making process[4] – is absolutely essential in trading. Traders have numerous risk management techniques available to them, including stop-loss and take-profit orders, diversification and setting a maximum limit on the amount of capital they allocate to one trade. In gambling, calculated risk management simply doesn’t exist.
Conclusion
Hopefully this clarifies the difference between trading and gambling. If you decide to trade the financial markets, you need to be mindful of each decision you make. This means never basing any decision on emotion or intuition. If you avoid that trap, you are more likely to separate your trading activity from gambling.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose.Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
[1] Marc Davis (April 9, 2012). “Investing Vs. Gambling: Where Is Your Money Safer?” Investopedia.
[2] Stephan Abraham. “Going All-In: Comparing Investing And Gambling.” Investopedia.
[3] Stephan Abraham. “Going All-In: Comparing Investing And Gambling.” Investopedia.
[4] Risk Management. Investopedia.
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