Trading vs Gambling, Part 1

By Sam Seiden,

The other day, I was spending time with a friend of mine I have been close with since we were children. For years, anytime my career comes up in conversation, he insists that my trading career is nothing more than gambling. At trading events and such, I often get asked if I think there is any difference between trading and gambling. It is a very hard question for me to answer because I think the whole question is wrong. Whether you are a trader, gambler in a casino, Pepsi buying advertising space on a network, retail store owner, casino, car dealer, franchise owner, street vendor, someone who buys and sells things on eBay, and so on, YOU ARE A SPECULATOR at some level. The trader takes on risk in a market for a potential reward. The gambler risks a $5.00 chip on the black jack table to try and make $10.00. Pepsi pays for commercial television time at a network (risk) hoping to see a return (reward) on that investment much greater than the cost of the commercial. The retail store owner buys inventory (risk) in hopes of selling that inventory to you and I at a much higher price (reward). I think you get the point. If you think of it this way, the real question becomes, "What type of speculator are you?"

Are you the type who only takes on risk when the odds are stacked in your favor, or are you the type that takes on risk when the opportunity "feels right" and "looks good?" My answer to my friend was simple. I said yes, trading and gambling are very similar but there is one big difference. I said, "Imagine playing black jack (21) and not having to bet any money until after you see the cards and then being able to bet as much or little or even not bet at all. If you do place a bet, you can then take all your money off the table whenever you want, THAT'S TRADING." In trading, we have the ability to put our hard earned money at risk only when the odds are very much stacked in our favor. A casino would love to have the odds that the astute market speculator is able to enjoy.

The issue is that most market speculators can't tell the difference between risk and opportunity. In fact, most get it completely backwards which is great for the astute market player. This novice group continuously falls for the many illusion traps in the market that disguise risk as opportunity. Let's look at an example of risk disguised as opportunity on Thursday, March 5th, in the Extended Learning Track (XLT) - Momentum Intraday Trading class.

Figure 1

This is a trading opportunity I found for XLT- MIT members while doing our pre-market analysis. SIGM had been upgraded and there were many positive news stories like the one you see above in the pre-market. All these positive influences on the stock were taken as invitations to buy, which many people did that morning. There were so many buyers that decided to join this bandwagon of good news that price gapped up at the open. What all these aggressive buyers failed to realize is that price was at a price level where the chart told us supply exceeded demand. If you look to the left of the chart, you will see that this area was the origin of a gap down in price. That gap down from that price level happened because there were many more willing sellers at that price level than buyers, period. That is the definition of supply (resistance) in a market. Over to the right on the chart, we noticed that price was gapping right into that level which meant we had novice buyers making the same two mistakes all novice market speculators make. First, they were buying AFTER a big rally in price and second, they were buying right AT price resistance (supply). The laws of supply and demand ensure that you will lose over time if you take that novice action and our XLT members know that. Our plan was to sell to those buyers once the market opened as they fell for the trap that disguises risk as opportunity. SIGM opened at $15.65, right into our supply zone and then proceeded to decline to $14.70.

Why can't most market speculators get it right? In my opinion, it's a combination of human emotion and just plain old laziness. People tend not to want to put in the hard (and smart) work it takes to develop the market skills needed to get paid from the "un-skilled." There are no short cuts. If someone is not interested in putting in the hard work it takes to attain proper trading skills, profitable trading opportunity will equally not be interested in them. The most rewarding opportunities always go to those who enjoy working hard, not those who lack interest in hard work.

If you are a trader who risks your trading account on the inconsistent whims of random chance, you are likely the trader trying to cut corners and looking for short cuts to trading success. In the world of "compensation," over time, you will get EXACTLY what you deserve. Life has a masterful way of evening the score. Your pay-back is eventually equal to your physical and mental efforts. If you're not motivated to develop the needed skill set, you will likely transfer your account over to someone else's account who is. I have been in this business for many years. Trust me, if there was a short cut to trading success I would have found it.

You see, whether you are a trader, Pepsi, or the retail store owner, or one of the others, all that really matters is the type of speculator you are. Those who invest the time and energy required to attain a rule-based strategy that locks them into low risk / high reward profits simply get paid from those who don't. It's how the world works.

Have a great day.