There's a difference between trading and gambling but the line between them is very thin. So, if you are just getting into trading, then you need to make sure that you do not cross that line and should know the difference between the two.
i. Gambling is betting money on a chance of something happening and trading is buying and selling of financial assets to make a profit.
ii. Trading is gambling if done with a plan.
iii. Organized speculation is when things are done with a plan and with an edge.
No, trading is not gambling. Trading and gambling may seem similar but there are vast differences between the two. Read further to understand the exact difference between trading and gambling.
Who is a Gambler?
A gambler is a person that wagers money or anything of value i.e. puts it at stake, on an event that has an uncertain outcome. The gambler hopes to win something out of this activity by taking a chance at the event.
In gambling, there is always some risk that is involved. Whenever a gambler puts his money or any other valuable item at stake, he is taking a risk. While he takes this risk, he hopes to win something in return that will make his activity of taking a risk and betting on an outcome, worthwhile.
Gamblers will put their money on the chance of an event taking place. The outcome of this event may depend on chance or accident alone.
Gambling activities involve betting on the roll of a dice or a roulette wheel, or in games like poker or blackjack, or betting on the result or outcomes of matches played in the various sports, or even in the lottery.
This is not an exhaustive list of gambling activities, everything can be gambled upon, this is the basic essence of gambling.
Hence in gambling, there is a stake i.e. money or anything else put on the line, there is risk i.e. uncertainty over the outcome of the event, and there is a prize that the gambler will win if he if predicted the outcome of the event right
Who is a trader?
In the most general sense, a trader is a person that buys and sells goods with the hope of making a profit in this process. In today’s time, almost every person has traded something or the other at some point in life.
In the financial sense, a trader is a person that buys and sells a financial product or an asset on the financial market. They could engage in this activity for themselves or on behalf of an institution.
The activity of trading is driven by profits, like any other activity. A trader will acquire stocks, commodities, derivatives, currencies, bonds, etc, and then trade them in return for a profit.
A normal shopkeeper can also be called a trader as they are also involved in buying and selling or products with an aim to make a profit.
In speculative trading, a trader will either buy or sell a financial asset i.e. take a long or short position in it expecting the price or value of the asset to rise or decline respectively. The trader can square off the positions i.e. sell or buy it accordingly and either book a profit or incur a loss.
In trading, there is always a risk involved. And for every risk taken, the trader will hope to earn a profit.
Hence in trading too, there money put on the line i.e. for acquiring the financial asset, the risk is involved as the price of the asset can increase or decrease, and a prize is involved wherein if the trader correctly forecasted the price movement, he stands to earn a profit on the trade.
Trading and gambling
We have discussed what gambling and trading are and have seen that both involved stake, risk, and a prize. But does this make trading and gambling the same?
There is a difference in the two with respect to the approach a gambler takes towards gambling and that the trader takes towards trading.
Whenever a person takes a plain bet on the outcome of an event solely relying on luck or chance, he is said to perform the act of gambling.
For instance, a person betting on the roll of dice to show a particular number is completely gambling.
Why is trading as a profession looked down on?
This is the point where trading as a profession is widely looked down upon. Whenever a trader bets on the outcome that the price or value of a financial asset increases or decreases, he is said to perform the act of gambling.
The sole thing that differentiates gambling from trading is the ‘why’ factor. Why does the trader think that the price of the asset will increase or decrease?
If the trader does not have an answer to the question, then it is plain gambling as there is no rationale behind the trade and the outcome is based on luck or chance.
But if the trader has a genuine rationale for the trade and knows why the price of the asset will experience a change, then is something we like to call organized speculation.
It is a commonly known fact that every game that is present and functioning inside a casino has its odds titled towards the casino or the house.
The casino runs these games with odds in their favor, in the short term they will lose money but in the long term, their odds will play out and they will always be profitable.
This is another difference between a pure gambler and a trader that is involved in organized speculation. A gambler thinks that the odds of him winning or losing is 50-50 but in reality, all games are not built with only 2 outcomes with equal odds.
Hence, the odds are stacked against the gambler and in the short term he may win and earn money but if spread over the long term, the gambler will lose money.
The main difference between trading and gambling
A trader that indulges in organized speculation knows about the odds that are in his favor in the trades he takes.
These types of traders will have a proper rationale behind the trade which is based on some sort of analysis that they perform before committing to the trade.
Such traders thus have a trading plan in place which gives them the ‘why’ of the trade.
The traders with sound trading plans know beforehand at which price they are to enter into the position, at which price level will they look to exit and book a profit, as well as at which price level they must exit the position in order to limit their loss in case the price moves against them.
Gamblers are often people that indulge in the activity of gambling in order to earn profits and get rich over a short period of time. This mentality when applied to all walks of life will lead to failure in the long term.
A good trader will know that small profits will lead to big profits in the long term and that he must keep his psychology and emotions in check and let his odds play out.
Therefore, a proper trade plan along with sound risk management and appropriate psychology is what differentiates trading from gambling.
How to know if you are gambling?
We now know that a gambler is a person that takes on an unprecedented risk hoping for the outcome to be in their favor. There is very little edge that a gambler has.
While a trader is someone that studies the conditions, has a ready setup or strategy in place, manages risk properly, keeps emotions away, and always sticks to the plan no matter what happens.
If you are someone that is unsure whether you are trading or gambling then here are some questions you must ask yourself before taking any further trades.
- Do you have a rationale for the trade? Do you know why you are taking the trade?
- Do you know the risks you will be exposed to when you enter the trade? Do you have a plan to manage this risk?
- Do you know at what price level you should enter, where you should exit in case the trade is in a profit, and also when it is in a loss?
- Can you control your emotions when in profit or even in loss? Can you walk away when you feel you are done for the day?
If your answer to any of these questions is a no, then you should really re-evaluate your trading habits and plan.
If you aren't following and applying all that we mentioned above then there are high chances that you are indulging in gambling and you need to learn to shift to trading from gambling.
How can you shift from gambling to trading?
We have discussed a lot on the topic of gambling and trading and have explored the vast differences between the two fields.
If you feel that you are gambling while trading or are not treating trading the way you should then we would seriously suggest you take a break from trading and make the changes that are necessary.
The first and foremost change you need to make is to ensure that you are taking the trade for the right reasons. The trades should have some practical rationale.
The trades should be based on some analysis and should not be taken on the basis of a gut feeling.
The next thing you need to do is to manage your emotions and the risks you will be exposed to in trading. Emotions and risk management often go hand in hand.
If a trader is not in the best of mindset or is allowing emotions to take control, he will fall into the greed trap and will end up taking larger than usual risks on the trade.
What if the trader fails and the trader loses? It will further mess up his emotions and can lead him to take revenge trades.
This is a vicious cycle that the trader falls into and it becomes difficult for him to get out of it.
A key method to control emotions in trading is by having realistic expectations. Trading is often portrayed as a get-rich-quick scheme.
Traders get into it with the aim of making millions in a matter of weeks. This is the most absurd thing to do and if you are someone like this then please rethink your decision to get into trading.
Have realistic and practical goals and expectations from trading. Have a plan to achieve those goals and stick to it all the time This will surely put you on the path to successful trading.
See it is so simple to trade rather than gamble, all that it requires is some discipline.