In the general public, any conversation about trading in the financial markets (and in particular day trading) usually leads most to conclude that it?s just another form of legalized gambling. People have been led to believe that sane people ?invest? and only the foolhardy try to get in and out of the market in a frequent matter. ??To most, investing in the stock market translates into buying and holding for the long-term and futures ? well, that?s tantamount to spinning the roulette wheel in Las Vegas.
This perception comes from the fact that people?s first exposure to futures trading usually involves a friend of a friend or distant relative that lost a bundle trading commodity futures, and it?s a rarity to find a profitable futures trader in the circles they frequent.? This almost always occurs because people get into trading on some sort of tip that appeals to their base emotion of greed.? Generally these folks don?t know what they?re doing and thus become fodder for the professional trader that makes her living from the ignorant market participant.? Similarly, the casino will produce huge profits from the typical gambler who doesn?t understand how the game is played and in most instances doesn?t even care.
It?s a well-known fact that casinos make billions of dollars from gambling profits. They do this because they have a mathematical edge in all the games they facilitate to the gambling public. ?When people visit Las Vegas or Atlantic City they resign themselves to losing and rationalize it by looking at the loss as an entertainment expense.
Professional gamblers however look at it much differently.? First off, they only play the games that can offer a higher probability of winning against the casinos.? Blackjack or twenty -one, as it?s sometimes called, is one of those games that a highly-skilled player can beat the house in.? That?s because in this game the odds a casino has are not as big as in most other casino games. Statistically speaking, a casino has a less than 1% edge in Blackjack. They increase their odds by dealing multiple decks and restricting some of the traditional moves to players.? Is it fair? Every player has to decide before they ante up ? just like in trading.
Many parallels can be made between trading and gambling, but I believe that you have a choice as to whether you want to trade like a casino, or like the gambler.? As mentioned earlier, a casino always has the odds stacked in its favor.? And you as a trader can too, if you have a viable strategy. Do casinos lose? Of course, you always hear about that lucky person that hit the jackpot on the slot machine. The occasional winner is there by design, since it keeps hope alive for that returning gambler.
Trading like a casino involves knowing how much to risk as well as the profit potential on every single trade.? Also having some statistical evidence of the probability of success is important.? If a trade is placed without any of these parameters, it is essentially a gamble.
In terms of speculating in the financial markets, I believe most people gamble. That?s because the vast majority of traders don?t have an edge. ?Astonishingly, if you ask a novice trader if he has an edge, many don?t know what an edge is.? Think about that for a moment.? What are the chances of success for someone entering into one of the most intensely competitive fields in the world without an edge? ?The answer is obvious, and yet so many try.
In the final analysis, to compete, a trader must be smarter than his opponent. ?He must be more disciplined, and have a better plan. Because only then can he ?start trading like a casino, and stop losing like a gambler.
Until next time, I hope everyone has a great week.