Recently a fellow trader (thank you Alex) emailed me of the parallels of trading and gambling at a casino. I have taken the liberty to paraphrase as well as add my own input into today’s blog post:
There is an extremely long thread on a LinkedIn forum debating the difference between gambling and trading. It is a fascinating subject of which most people have a strong opinion on.
For me, the difference between trading and gambling is the same as the difference between being the house and being the guy in the chair at the blackjack table. Casinos win at their games of chance by having a slight edge and sticking to the rules of play. Gamblers lose, not only because the odds are against them, but because they are inconsistent in the application of their bets –the average bettor loses more than what the odds against him dictate he/she should lose. Gamblers go by “feel” or emotion, a state of mind encouraged by casinos with their festive atmosphere, loud noises, pretty staff, free drinks, etc.
The house controls the size of the bets they take (money management), they know the probability of making money (their system), they can’t control the cards any more than we can control what a stock/ETF/Mutual Fund et al is going to do, but they know that their system will make them money over time.
In trading, the newsletters, brokers, twitter feeds, TV shows, and so on are like the distractions in a casino. Contrary to their customers, Casinos earn incredible profits using math and strict discipline. Most casinos can predict their revenue within a few dollars based on the number of people that walk through their doors. Yet despite all their technological firepower, they can’t predict which specific patron (trade) will win and which will lose — but they don’t care, because in the end, their edge shines through and they make a ton of money.
Of course you could argue that people who visit a casino, expect to lose, it’s purely for entertainment value, but traders expect to win, it’s not very entertaining to lose money in the market, completely different mentality and approach, but with the same outcome if you don’t act like the house.
Bottom line for successful traders: Be the casino, not the patron. Have a system, know how well the system has performed in the past. Like the Casino, know your stats: Percentage of time it was right v wrong, average size of winning trade v losing trade and max drawdown over time. Without knowing the stats it will be difficult to endure when things don’t go as well as you hoped. Then follow with strict discipline, cutting your losses short and letting your winners run, as the odds are in your favour over time.