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In today’s episode, you’ll discover whether trading is gambling, or not.
So listen to it now…
Forex Risk Management and Position Sizing (The Complete Guide)
How to Create a Trading Journal and Find Your Edge in the Markets
Hey, hey, what’s up my friend? So in today’s episode, I want to discuss if trading is gambling. I’m sure that’s a question that has popped up in your head from time to time.
If you go down to trading forums you’ll see people creating threads discussing if trading is gambling and you’ll have quick answers like “Yes, trading is gambling, you’re a gambler!”
Then on the other camp, you’ll have people saying, “No, trading is not gambling, trading’s, a legitimate business,” etc. Now the question is, who’s right and who’s wrong? I’m going to share with you my point of view to whether trading is gambling.
First and foremost, let’s define gambling.
What is gambling?
Well, in today’s modern society, gambling is where you risk your own money to make even more money, and you agree at the start, that there’s a possibility of you losing your money if things don’t go your way.
And there’s also a possibility of you making even more money if things do go your way. That’s gambling. There’s a probability of you losing or winning.
If you ask me gambling is kind of like the main category. Under gambling, there are many forms of gambling, you have sports betting, you have casino games like Poker, Baccarat, etc. and then you have trading. There are different forms of gambling out there.
In my opinion, trading is a form of gambling. And it’s only one form of gambling. And I’m sure you can agree, that as a gambler, there are professional gamblers that make money consistently. And then they are the majority of gamblers who lose money consistently.
There are professional poker players who go to the casino and they are consistently profitable, they treat poker as a serious business. Then you have sports better who analyse the math out there on all the different sports results and then place their bets.
Those are professional gamblers as well. They make money in the long run. And it’s the same for trading.
Depending on how you look at it, whether you’re serious about it and treat this as a professional business. Only a small percentage of people will make money in the long run and the majority will lose money.
In my opinion, trading is gambling. But it doesn’t mean that you have to be a loser. As much as there are professional gamblers out there who wins, and there is the majority who lose most of the time and it’s the same for trading.
That’s my take on whether trading is gambling. Now the question is, how do you be different from the majority of the losers? How do you be that small percentage of winners that make money in the long run? That’s the question.
Now let’s look at this from a casino’s point of view because they’re kind of like the biggest gambling house out there.
For a casino to make money consistently in the long run, there are two main ingredients that they need (let’s not talk about all the other marketing strategies out there to attract clients and stuff like that). Let’s start with the two main ingredients they need.
Casinos’ games must have an edge over the players
This means they must have a positive expectancy, the house must have an edge over the players. This means that the games that they have must be skewed in favour of the casino. But that doesn’t mean that the casino cannot lose in the short run.
Yes, they can lose in the short run, but in the grand scheme of things, when you look at the statistics, the casino has an edge over the players.
It’s a mathematical edge like a dice. Let’s say every time the dice comes up 1, 3 or 5, the casino wins $2. Every time it comes up 2, 4 or 6, the casino loses $1.80. In the grand scheme of things, a casino will make money in the long run because they have an edge in the dice roll that I just shared with you.
Casino needs risk management
Just because they have an edge, doesn’t mean they can let a big high time roller bet $1 billion on one round of gamble because that could simply bankrupt the entire casino if that gamble doesn’t work out for the casino.
So they have risk management, they have table limits to contain their losses. These are the two main ingredients. There is how casinos make money in the long run. And it’s the same for trading.
You must have an edge in the market to be a winning trader
Now for a trader, your edge is slightly different because you’re not rolling a dice where your outcome is just 1, 2, 3, 4, 5 or 6, your possible outcomes are almost unlimited.
The way to get an edge in markets, in my opinion, is to take advantage of human behavioural biases.
Take trend following, for example, it does well during a crisis period. And why is that it’s simple. Because when the market collapses, investors and traders will think similarly, to sell all the risky assets, sell the stocks, sell the stock markets to buy bonds and gold.
This will lead to trends in these markets and when these markets trend, then guess what? Trend followers make money because they exploit trends in the market. That’s one – exploiting behavioural biases in the market.
And trend following is not the only way to trade. You can also look at things like mean reversion trading in the stock markets, so when there’s a sharp pullback or retracement due to oversold of certain stocks or panic selling, usually, over the next few days, the stock will rebound higher.
So if you can exploit again such a short term panic selling in the stock markets, you can buy low and sell high. That’s another way to extract edge in the markets. That’s the first thing.
You must have risk management
This means that you agree that you could be wrong on the trade and you want to make sure that when you’re wrong, it doesn’t wipe out your entire bankroll, it doesn’t wipe out your entire trading account.
This is very simple, it’s all about position sizing, stop loss, etc. I have articles devoted to these on my website so you can just check it out.
Now the question is, how to find an edge in markets?
Read trading books with backtested results
I’ve said this several times on this show. You can go and read trading books that have backtested results that come with it.
For example, a few that come to mind now could be Unholy Grails by Nick Radge, Following the Trend by Andreas Clenow, Buy the Fear Sell the Greed by Larry Connors
This books already have the system and the backtested results for you to check out. But don’t just take it at face value. Take the system, tweak it and test it and validate it and see whether it works for you. Don’t trade anything blindly.
That’s the first thing and the easiest way to get an edge in financial markets.
Next, what about risk management? How do you apply proper risk management?
Search for position sizing calculator
Just search Google for position sizing calculator for stocks, position sizing calculator for forex, or whatever market you’re trading, enter the account size, the amount of risk, and they will tell you how much to risk or how many units of shares to buy or currencies to buy based on your risk profile. And that’s pretty much it.
That’s how you could go about getting an edge, getting a competitive advantage over the other traders out there. I hope this makes sense.
Here’s a quick recap…
- Is trading gambling – in my opinion, yes according to the definition, trading is gambling.
- As a gambler, and as a trader, the majority are losers and there’s only a small minority, who win consistently over time and you want to reverse engineer what the winners are doing – trade with a positive expectancy with an edge and practice proper risk management
With that said, I have come to the end of this episode and I’ll talk to you soon.