February 15th 2007
Trading vs. Gambling
Matt Coddington at netbusinessblog.com has posted an article discussing if there is a “right way to earn”. The article asks the question if it is right or wrong to make money off websites that deal in advertising arbitrage, pornography, or gambling. I left a comment stating that “personally, I am opposed to making a living in activities that I feel are blatantly destructive to a person”. I stated that my trading profession “walks a thin line” in that it has the capacity to be addicting and abused as in gambling.
It got me thinking about what the difference is between gambling and trading. I’ve had this conversation with people before and to someone not involved in market speculation I can see how trading does appear to be gambling. So I wanted to use a post to address this issue. My thoughts centered around three main points:
1. I thought that trading is not gambling because gamblers do not respect risk. The focus in gambling is how much money I can make where as a trader looks at how much they can lose. Each trade I evaluate has a stop. I gauge the risk in a trade by asking questions like what the trend is of the overall market. But in reality some poker players have a healthy respect for risk. Good players know how to calculate the odds of a winning hand and they adjust the amount they bet accordingly.
2. Well, then I thought, trading is not gambling because trading decisions are put in the context of a system. This should remove the emotions out of the decision making process. There is a template that the trader uses to evaluate his/her trades. That template is overlaid on the market when we evaluate what to do next. Our decisions are based on what that methodology tells us to do, not what we hope or feel should happen. This was getting closer to a real difference. However, there are several systems for playing poker. Some way more complex than my own trading methodology.
3. Which brings me to my third thought: True trading is devoid of emotions. If I’m really trading and not gambling, my decisions are emotion free. Where as a gambler hopes and dreams that the next bet will hit the jackpot, I systematically buy and sell with the same rules, day after day. I don’t really care if i win or lose. My focus is on how well I executed my trading plan.
Trading as a business is cliché, but it’s true. I’ll use one of my favorite analogies where you substitute trading for a clothing store:
Could you imagine a clothing store manager buying inventory strictly on the hope that they’ll make a killing on it? Does it make sense that this store would not do any market research? Or any kind of due diligence before making their buying decisions. And does it make sense that this store would hold onto inventory that wasn’t selling, that wasn’t in demand, even though they really liked the color? No. How about this one: If the store specialized in shoes, and each year did the same process for predicting market demand, doing their due diligence, finding the best supplier, and marketing their products; if the store had a bad month, would they angrily dump their inventory and totally change their business model? Would I change my trading business model?
Since trading is like any other business, the difference between gambling and trading is that I treat trading like a business. When I don’t, I am gambling. When I let my emotions govern my decisions instead of the business processes and methodology that have stood years of testing and careful, selective, revision; I am gambling.
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7 Comments »
THIERRYerry on 17 Feb 2007 at 7:21 pm #
I REALLY LIKE AND AGREE WITH YOU ON THIS ARTICLE ….I HAD THE OPPORTUNITY TO GO TO NAASAU BAHAMAS …SPEND A COUPLE OF HOURS IN A CASINO AND YOU WILL SEE THAT A GAMBLER IS REALLY NOT A TRADER
GOOD WEBSITE , GOOD JOB , AT LEAST HERE WE CAN LEARN SOMETHING
jonnels on 17 Feb 2007 at 7:47 pm #
Thanks for the comment. You know, I love to play poker, but even though it parallels trading in many ways. It’s still a game that doesn’t benefit anyone. I think trading vs. gambling is a complex issue. I’m sure it will come up again in future posts.
thierry on 18 Feb 2007 at 7:39 pm #
he
thierry on 18 Feb 2007 at 7:45 pm #
hello jonathan , for the one not very good with the computer , can you explain how you can reply on a black background , i cannot see what i am writing ….my question was can you explain what is your methodology …i am new in the game ….good luck with the kids …you will see one day you will be like me ..taking care of the grand kids …..have a good day off
thierry
jonnels on 19 Feb 2007 at 6:27 am #
I’ve got to fix the color of the font. I’ll work on that. Regarding my methodology, I will put that in its own page very soon.
andy on 21 Jan 2008 at 4:26 pm #
hey, i just stumbled upon your website and am looking through your posts as i am interested in trading and the finance industry. first and foremost, your blog is among the better ‘trading’ blogs IMHO, because i have come across many that just say the same things (there is probably a few million ‘trading’ blogs out there that repeat each other, mirror images of themselves, saying things like ‘do not put all eggs on one basket’ and other hackneyed adages).
anyway, i disagree with the last and final point you made in this entry that trading is more of a business than gambling, and that sets it apart. gambling can also be treated as a business, making decisions devoid of emotion. i know many online poker players who perform well in tournaments because they are on their game for hours on end (on their game means playing their best and making decisions not based on emotions, or in poker lingo, ‘going on tilt’). in this respect, gambling and trading are still the same.
what i believe sets trading apart from gambling is that you can have ‘an edge’ over other traders. large investment banks have this edge in being more knowledgeable than other individual traders (more information, higher internet bandwidth to execute orders immediately, more people working for them, more capital and therefore more leverage). if you knew inside information on a company, you have an edge over other traders.
in gambling, most players all are in the same position. the only thing that changes is the amount of chips one player has (this is true in poker, players who are shortstacked have a harder chance to win chips). another thing that changes (also in the scope of poker) is that seat position matters, where you are positioned according to the dealer. of course, the dealer rotates so that eliminates this problem over the course of a few rounds. but in almost any other gambling situation, roulette, craps, slot machines, all players (except the house) have equal chance to win money. the only real legit edge is card counting, but, like the theory that says the market will always become more efficient, casinos are working to get rid of card counters (using new decks each round, etc).
the potential edge that traders can have over other traders is what separates trading from gambling.
let me know what you think, your thoughts are most appreciated.
Jonathan on 21 Jan 2008 at 7:55 pm #
Hi Andy,
That’s an astute observation. Edge is certainly the key ingredient to a successful trading operation, but I still think it’s the consistent application of that edge which separates trading from gambling.
There are literally, thousands of “edges” out there in the form of trading systems and I think you could be successful with many of them, but it’s the consistent application of your edge, through various market conditions, that separates the trader from the gambler, and ultimately, success from failure.
I certainly can’t speak for all traders. Perhaps there are many who are able to systematically apply their edge when they’ve “gone tilt”. I cannot. When I start to think of money as anything else than inventory, I go crazy. My trading decisions in that context have historically been poor.
Thank you for the compliment. I really appreciate you stopping by and sharing your thoughts.