In this episode of 2 Traders Podcast, Walter talks about one the most common questions for traders and non-traders alike: Is trading the same thing as gambling?
This episode revolves around these ideas: is trading the same as gambling?? What is sound risk management? And when does over-trading become a problem?
Darren agrees that while — essentially, in the context of the word — trading is gambling, it might also be just the perception of trading. There’s a bit more to it than that…
If trading is gambling, is there a way to “gamble” for consistent profits over the long haul?
Also, the discussion wanders into betting on horses and playing the slot machines, and how to identify a professional trader from a gambler.
Download (Duration: 19:37 / 22.4 MB)
In this episode:
00:35 – is trading gambling?
01:32 – gambling idea
02:29 – uncertain outcome
04:26 – why aren’t the banks doing it?
06:04 – trading perception
07:14 – less reckless
09:26 – same mindset
10:17 – just lucky
12:10 – breadth of knowledge
13:26 – try new things
15:27 – different approach
16:46 – same endeavor
18:07 – live markets
If trading is gambling, is there a way to make it work for the long haul? [Click To Tweet].
Having a strong belief about the market will help you tell what you are doing. [Click To Tweet].
Don’t narrow down your focus in one trade setup. Broaden your system and take time to look at different avenues. [Click To Tweet].
Walter: They don’t sit down thinking “I’m going to take a trade today”. But they sit down and they think: “Is there a trade today? Is there something that looks so good that I have to take it?”
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome to the Two Traders Podcast. Walter here, and Darren is on the line. Today, we’re going to talk about gambling, Darren. What does that mean to you?
Darren: Is trading gambling? For me, it’s certainly is a hundred percent gambling. If you’ll look at a dictionary of the definition of gambling, it’s risking money on an event with an uncertain outcome.
I believe that’s what we do when we’re trading. I also think that it’s probably a good idea to have a mindset: there is gambling as well. Because, as soon as you start believing that you’ve got some way of beating in the market, then you’re taking yourself into a mindset that you can’t lose and that your system will always work like it has in the past.
That’s when you can really get into trouble and start doing things like over trading. Because you’re so convinced that you’re going to make it back on this next trade which is also a great set up ‘till you know once before it’ll get lost. You lose sight of your risk management. So for me, trading is gambling and it’s a good idea to think of it as gambling as well.
Walter: Well, I think you bring up some really good points such as, if you’re so certain that it’s not gambling — that there’s a certain outcome — then you’d be foolish not to take more opportunities. In other words, it’s over-trade which is we both know a huge problem for traders out there.
But, I’m going to come down on the other side of the fence here. I’m going to say that there are a lot of things about trading that are similar to gambling. When you think about gambling, the casinos also are in the game of gambling but you rarely see a casino go belly up.
I mean, they tend to stand around for a long time and make lots of money and they’re in the gambling business, of course. But, they’re on the side where they’ve got odds that they can rely on and generally, over the long haul, they know that they’re going to be making money and historically, they have.
That’s one thing I would say. I would agree with the uncertain outcome. If you’ll stick with the strict definition of the dictionary, then yes, trading is gambling. We as traders get paid to do what? To take on risk. Other people out there have their money and they want to use their money on other things. They don’t want to spend it on risk because it’s too risky or it’s too uncertain or they don’t know what is going to happen. They don’t do that.
Traders are the ones that put their arms up and say “I’ll do it. I’ll put my risk money up here and I’m willing to go ahead and whatever the consequences may be, I’ll have to live with them. I hope that, more often than not — maybe not more often than not — but the end result of all of this time when I risk money will be that I’ll actually come out ahead in the end”. Which is just exactly what a professional gambler does.
I would have to agree that the strict definition of the dictionary would identify what we do as trader as gambling. However, I think that — in everyday speak — when we say “gambling” that has a negative connotation as “that’s gambling” or “she gambles or he…” You know what I mean?
Darren: It’s considered as reckless, isn’t it?
Darren: To gamble with your money.
Walter: Yeah, I agree with you. It is an uncertain outcome. Here’s the thing that always interest me when people — and this is difficult — like, if you have a partner who looks and frowns in your trading because they say “it’s gambling”, then you’ve got a lot of pressure to do well; to show, to prove to your wife or your husbands or whoever your boyfriend/girlfriend that this is something that is viable as a choice. Maybe not even your primary job but it’s something that you do on the side or whatever, outside of your job.
You have to think. If trading were really gambling and in the same category as betting on horses and dogs and playing the one arm bandit and the pokey machine as they call them in Australia here, then why aren’t the banks doing it?
If you’re listening to this and you’re near a city, you can go into that city and you can look at the big, tall buildings in the middle of the city. Those are all the banks. We know that. Every city across the world, you go downtown, you look up and you’ll see bank buildings. The big, nice ones.
Those companies, those banks, they don’t bet on horses. We know that they don’t bet on horses because they don’t report that they bet on horses to their shareholders. But, they do almost universally make money in the currency markets.
Now, they don’t do exactly what you or I do but they are in the same game of risking capital. To make capital over the long haul. That’s one thing that I think you can point to and say “well there must be something, slightly different about this.”
Even if we use the same probabilities, the same statistics that gamblers and professional gamblers use, when we’re looking at our odds and trying to workout whether or not this is going to make money over the long haul.
The same thing what the casinos do but it’s a little bit different to betting on horses or dogs or whatever. That’s how I look at it. I don’t know if that’s the correct way and maybe I’m stuck into this thinking that I can control the overall outcome. I know what the general outcome is going to be over the long haul but that’s kind of the way that I see it.
My question for you would be: Darren, what are some of the elements of trading that are more or less — like traditionally — think of it as gambling; or would you just say across the board, trading is the same as betting on horses or whatever?
Darren: I think with trading, it’s just the perception of trading. Like you say, because it’s associated with banks and guys in Wall Street in suits with good educations, I think that’s all that makes it appear less reckless.
I’m pretty sure that, with how retail tradings are spreading now, it won’t be long before we see special places set up for addiction to trading. Like we have slot machines and betting on the horses, etcetera.
The main difference is, if you look at professional gamblers whether it be poker or betting on horses, their approach to gambling is much more considered. With trading, people rather just set up an account and bet like you could with the horses. Like, you just walk into pokeys, pick a name.
People perhaps look into it a little bit more and study what’s required and do a bit of education with trading. I think that kind of makes it slightly less reckless. But beneath it all, to me, it’s essentially the same and I have studied some really good professional gamblers who bet on horses. When you really break it down, the techniques and how they go about their trading, how they look at their risks and their rewards, really it’s very very similar.
Walter: Yeah, absolutely. I’ve heard some professionals on podcast talk about betting on different sports game and things like that. They’re always talking in terms of risks and rewards like: “the market has really beat down this bet so, it’s a good risks/rewards and I’m going to take it.” That sort of thing.
It’s not that they’re betting on who they think is going to win. It’s that they’re taking these opportunities as they present themselves because the market seems to have discounted the likelihood that one of the teams are going to win or something like that. You know what I mean?
It’s like they’re waiting for the market. That’s why they’ll say things like “wait for the line to come down”. I don’t really listen to this a lot but I have heard them a few times. It’s fascinating because they’re really sort of playing the market on the bet. They’re not really playing the bet. They’re playing the market on the bet.
What I mean by that is, at the beginning of the week, your favorite team is three-point favorite. So, they’ll wait until — your team — the market pushes that down and when they’re only two-point favorite and then they’ll take the bet.
They do things like that, which I find fascinating. I guess in a way, it’s not really much different from… If I see a big shadow or an engulfing candle in the market, to me, that’s the market showing it’s hand.
Now, I know it’s not always going to workout. It’s not always going to be the case and that ends up being profitable trade but, I believe that the market is doing something funny. That gives me opportunity to get in. I think the professional gambler see it the same way, where they’re just waiting for the market to get to a point where they say “okay there’s something going on here and it’s a good place to jump in”.
I think the best traders I’ve ever work with, they have the same mindset where they don’t sit down thinking “I’m going to take a trade today.” But, they sit down and they think: “Is there a trade today? Is there something that looks so good, I have to take it”. Rather than “okay, I’m home from work, it’s seven pm, I want to sit down and bang out some trade”.
They don’t approach it like that. They think that. They are patient and they think that they are pouncing on a market when something has kind of set-up so they can do that. It’s interesting.
I was in Las Vegas and then I met a friend of mine. She knew a bunch of professional gamblers. I didn’t really know who these guys were and apparently they’re really famous so it was interesting to spend time with them. They were all poker players and she was explaining to me that people say that these professional poker players were just lucky or whatever. But, why do they keep winning then? Why is it that they cue? Is it just that they’re the story we have at “a thousand monkeys all banging on the typewriter and one of them ends up with Shakespeare”?
Is it just by dumb luck? Is that what really it is? That these guys were just very very lucky? Or is there something going on here? Where they able to understand the odds and how the odds are shifting as the deck is changing? Now, they’re reading people’s emotions and all those things that go into poker.
My next question would be: let’s say that we agree that all of the smartest graduates coming out of universities, they all want to go into finance because that’s the industry that pays off the best and it is gambling. If it is gambling — if trading is gambling– then, is there anything that we can do other than just be lucky to be good at it? What can you possibly do?
In other words, is there a way that you can make this gambling work for you over the long haul? Maybe not over the next trade, or over the next ten trades, but over the next thousand or ten thousand trades. Is there something that you can do to make this work for you?
For example, in blackjack you can count cards. If you’re playing blackjack against the dealer, you can count cards and that’s going to give you an advantage. If you can count the cards, you know how many tens were in there and all that. That will give you an advantage. In fact, casinos will kick you out if they know that you’re doing it. But is trading the same?
Darren: Yeah. They’ve done a lot trying to cut that all out.
Walter: Yeah, exactly. Is trading the same way? Is there one thing that you can do and say “Okay, I’ll raise my hand. I agree it’s gambling. I don’t know what to do, though? What do I do to make it work?” What do you say to that?
Darren: That’s really difficult to sum up. If we go back to the podcast we did the other week, I think having a breadth of knowledge is going to help. I know a lot of people would say “to specialize in one thing.” Eventually, you get to that point. But, there’s a lot of negatives about when you start out trading; trying lots of different strategy and choking around.
I actually think that helps in the long run and you can see that everything is the same really. It would be like the poker player who’s really good at bluffing and winning on when he hasn’t got good hands and the other poker players who is patient and wait for really good hands before betting strongly.
The same goes on in trading. It’s having wide knowledge of trading and strategies and through past experience. Not just through reading. Reading can only give you so much. They say “the ten finest hours in front of the chart, practice makes perfect.” That’s heavily debated now with the practice makes perfect.
If you focus to an hourly so yeah, practice, give yourself time. Also, don’t be afraid to try new things and look at different avenues. See what that tells you about what you are doing and then you may eventually go back to your original strategy. But, having that open mind view of it can really help.
Walter: Interesting. I like these points. One thing that reminds me of “looking at different strategies as a trader when you first getting your feet wet”, is the idea when you go to university. Basically, they have a course. A set of courses in most colleges where you have to take certain… you have to have breadth of experience.
To get your degree, your four year degree from the university, they expect you to do certain things; take certain courses and have some background of things to learn. The same thing happens to many traders where they will look at different strategies; some of them trend following, some of them revergent to the mean, some of them break-out swing trading. They’ll look at different types of things and they’ll see how others approach those and then they’ll gravitate to something that makes sense to them.
For example, if I did a whole schooling in psychology but, really — if you break it down — psychology isn’t that different from biology. You have the same things going on. You have certain biologist who have their own pet theories about this and that or whatever. There’ll be other biologist who don’t agree and are doing experiments to try and show that those people are wrong and so forth.
The same thing with physics or whatever. You get the same things going on where people get really really focused on a certain idea or problem and they spend their whole lives working on it.
What will typically happen is somebody will come in from left field, from totally different discipline and totally blow the whole thing up, because they’re coming up at completely different angle. That often happens in endings like psychology or physics or whatever. You’ll get someone who comes in with a totally different approach.
That’s why having a lot of background in trading and different systems can help you. One, you’re exposed to different ideas and you see how different traders approach it. Two, you also will eventually hit the jackpot because you’ll see something that resonates with your beliefs about the market.
If you don’t believe that the market gets really quiet and constricted and then just breaks out and goes crazy, then you’ll probably never going to trade the breakout system. That won’t make sense to you.
I agree, you nailed it on that one. It’s good to have this breadth of experience with trading systems that certainly makes sense.
Darren: Yeah, with the gambling thing, be open minded about it. We can learn a lot as traders by thinking about who’s successful in gambling. Most people, when they gamble, they lose their money. Most people , when they trade, lose their money as well.
So, there’s parallels going on there and people perhaps considers why people lose money when they’re gambling. Then it’ll probably give you some good heads why probably you’re not winning when trading as well.
To me, they’re both different sections of the same endeavor. Personally, I find it much more comforting to think of it as gambling than I ever did when I thought it was academic thing that I needed to learn and master. I think that has helped me to adopt that mindset.
Walter: Right. There’s another thing I just wanted to ask you because I think you bring up a really good point about the ten thousand hours thing. We know that at a certain stage, the brain can get to a point where you can become an expert. Some of the exposures to the event, to the thing that you’re doing: playing the flute, trading the EUR or whatever it is.
My question is: let’s say that, because I see where your angle is, you’re saying like “does it really make perfect, does practice really make perfect” What if it didn’t? What if practice didn’t make it perfect?
I’m not saying that I didn’t necessarily agree with that. But, what if it just gave us confidence because we’ve seen so many charts and pulled down this eye level for the trader. Let’s say that the fact that the trader has taken ten thousand trades on the EUR, does it really make him any better a trader? Just because he’s done this. He now feels a certain level of confidence that he didn’t have before in his trading. When he goes to live markets and start trading live, he approaches it differently.
There’s value in that right?
Darren: Right. Definitely you will gain something from doing anything repeatedly. The danger is to become too fixed in your mindset that: “Okay, I’m just going to trade this set up on the EUR and I’m just going to do this until I make it work” Because you’ve narrowed your focus, then you’ll quite likely to miss out glare on obvious things.
I’m suggesting that maybe, you should vary your system. There are other lessons you could be learning and because you’re sort of narrowed on your focus, you might miss out on those. Certainly, you need time, but you shouldn’t be too narrow on your focus.
Walter: Sure, yeah. That makes sense. Well, I appreciate this one, Darren. I like these discussions when we have kind of break it down and get to the nitty-gritty of just one idea which is something that everyone had to consider that trading is gambling. I hope it’s been good for you and our listener and I appreciate your time, Darren.
Darren: Okay, yeah. Thanks, Walter. See you next time.
Walter: Okay, bye.