Is Stock Trading Gambling?

Hello World,  

On the 26th of December 2018, I attended the wedding reception of a family friend. My parents and I drove down from Trivandrum to Ernakulam, which is a 6-hour journey. We ended up reaching the place a bit earlier, and while waiting for the function to begin, I met Mr. X, a 50 something gentleman who ran a pretty pop trading brokerage firm in the city.

I was thrilled!

For me, it was an opportunity to pick his brains. I told him about my interest in trading and saw a bit of skepticism in him.

He quizzed me a bit more as to why trading.

After hearing me out, he said, “Trading in one way is just gambling. Real money is in investing. People now a day are impatient and addicted to quick returns”. He also threw in a Warren Buffet quote for good effect.

I am not sure if he made that statement to dissuade me from burning my capital or if that was his true perspective. Unfortunately, our conversation was cut short, and we parted with an understanding that we will catch-up soon in his office.

This got me thinking big time!

I knew there was a general skepticism around stock trading from folks without exposure to the domain. I am pretty sure my parents and in-laws can’t fathom someone trading for a living, and that is understandable.

What I wasn’t bracing for was a guy running a brokerage firm telling me that trading was gambling?

A while back, I would have nodded my head and accepted it without any question. Hell, I might also have dissuaded anybody who dared to talk to me about stocks quoting Mr. X!

I am credited to be convincingly dissuasive 🙂

However, times have changed!

I have listened to more hours of content on trading in the last 18 months than I have listened to music in my entire life!

The amount of reading I have done on trading is almost equal to the amount of reading I have done on cricket over the past year, which is a big deal since almost all my days start and end with cricket!

It made me realize that many folks have made much money out of trading, and that is not by chance. Most of them had certain specific qualities, which they repeat day in and day out.

So, here I am, noting down my learning about how gambling and trading are similar and yet poles apart!

Stock Trading is not Gambling. So do not approach it like it!

So, why is the Bad?

One of the primary reasons is that both of it seem to share a similar fabric from a layman’s point of view.

Both are zero-sum games. It means the loser hands over the money to the winner.

Moreover, words such as punts, odds, predict/guess, are unfortunately used interchangeably to define both gambling and stock trading!

Let us take the example of a Roulette game. It is the same game in the image made iconic by a lot of Hollywood movies.

In its basic form, a person playing a game of roulette will pick a number on the wheel. The dealer will then spin the wheel with a ball trying to settle itself in one of the slots with different numbers on it.  

If it settles in on the slot with the number chosen by the player, he wins. If it doesn’t, he loses and hands over his investment to the dealer.

Most people view stock trading in a similar light!

A trader selects a stock of choice from thousands in the market. Once you take a trade, it can go either way, which is beyond any one’s control. In the most obvious scenario, if the stock goes up, the trader makes money. If it goes down, the trader loses money.

All that is true, but what one also needs to understand is that Stock Trading is a humungous business, with many players and impacting variables in it. Once you understand and accept it and establish your space, this is a gold mine!

Anha! But that still doesn’t tell me if it is gambling or not!

Unfortunately, the answer is obvious, but not straightforward. Though the statement might seem a bit confusing, it is relatively simple!

Stock trading becomes how the trader sees it! It is a gamble if the trader sees and approaches it as a gamble. It is science if the trader sees and approaches it as a science!

Still grainy? I will explain!

As mentioned in this post, there are two different approaches in the market – Investing and Trading.

Investing focuses on unlocking the value of a stock over a while, mainly through the fundamentals of a company, whereas trading focuses on riding the current trend to make money using technical analysis.  

The fundamental approach relies on company growth, whereby, anyone who invested in it early enough grows together over time. On the other hand, stock trading, as mentioned above, is a zero-sum game.

It is also a fact that the majority of traders lose. The stats are skewed – 93% of traders lose money in the market to the remaining 7%.

In the long run, 93% are gambling, and 7% are approaching the entire business of trading scientifically.

So what does a scientific approach consists of?

Preparation

A gambler is swept into the world by gambling with seldom preparation. You don’t know your hand, and that makes it skewed. Once in, you have no control over the outcome, and your past performance gives you no indication of how the future will be. There is no guarantee your luck will continue, improve, or decline!

Trading is very different. It is a game of probability, but there is a way to figure it out. You have to keep preparing yourself like how a seasoned chef would prepare himself before cooking for a 1000 person feast. Identify a menu, sharpen your knives, prep your ingredients, have a plan, and stick to it.

As mentioned in this post, stocks tend to move in similar patterns over a while at different price points. As a trader, we have access to all the date we need to analyze and figure out the movement.

It isn’t all guts. It is never guts in the long run. You might have a win or two, but on an average, you will end up losing all your capital, if you use guts as your primary tool for trading.

Instead, successful traders carefully evaluate a trade for risk and return, based on historical data. They backtest their strategies extensively to sharpen their strategy.

Based on the evaluation, the trader builds a hypothesis. Once they enter the trade, it is continuously observed to make sure that the hypothesis remains valid. Once an indicator suggests invalidation of the hypothesis, the trader has an option of getting out of the trade without significant capital loss.

Also, trading lets you make more money on your right decisions and cut your losses on wrong choices.

In gambling, even if you make money, a new decision brings you back to square one with the same amount of risk involved in it.

Psychology

It is one area where trading and gambling are most similar, and the statement, Stock trading is what the trader sees it as!” is most relevant.

If they see it as a happy place, it becomes comfortable. If they see it as a stressful venture, it becomes stressful!

Whether it is trading or gambling, money is at stake, and a careless mistake costs dearly.

However, when it comes to gambling, you get sucked into the cycle. It drains you emotionally and induces error. There are no rules you can rely on to save yourself as the odds are against you. You keep going on and on without an apparent safety net to protect your capital.

Trading is similar in terms of risk but inverse in terms of approach. It allows you to box yourself with a set of rules which insures you.

The best of traders use rules to eliminate emotions from their trades. Moreover, this works only because the probability can be assessed to support your decisions.

Universe

In gambling, you pulled into the casino’s universe. From the moment you enter, you are in their territory. They will drive the conversation and influence your decisions.

Trading, on the other hand, lets you set your universe to your comfort. It can be in terms of what stocks you want to trade, what risk you want to take, what loss you can afford and what return you want to make, and you can exit at the very moment you feel like doing it.

It is a defined system which helps you keep your fate in check.

Spectrum of Learning

Gambling leaves a very narrow leeway for the player to learn. Once you move over the rules and the mode of playing the game, learning becomes one dimensional in terms of practice.

Trading is a whole different level in terms of learning. The market is never the same, and a strategy you are using today might not work tomorrow. So, you have to keep evolving. Evolution is in term of concepts, strategies, and experiences.

Also, if you don’t evolve, you end up at the bottom of the food chain for the stronger ones to eat up!

Conclusion

To summarize, trading is gambling for those who fall into the 93% of the population. Our objective is to fit into the 7%.

Approach it scientifically!

Create your universe. Set your rules. Be within them and keep growing.

You will end up losing money. That is a given. You have to make way more money than you lose. It is like any other business. If a possible loss is going to deter your first steps, then trading is not meant for you!

What I would suggest is to take baby steps. Get learning. Build your appetite slowly, before plunging in with your entire being 🙂

I am going to take a break for some time since work is getting hectic, and I am feeling a disconnect in the approach of tackling posts serially. I will be back once I figure out a more organized method.

Until Then, Cheers

Tribin

Reference for this post:

  • I have referred to this video by Adam Khoo. His videos are something you shouldn’t miss while trying to learn more about trading.
  • Another video that I referred to was by Sasha Evadkov from TradersflyHe also puts out solid content and has an unique way of explaining concepts 🙂

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