The Striking Similarities Between Trading and Gambling

There's an upside to how similar the two practices are.

Blackjack game with dealer and money on table
Understanding the business of gambling can help you understand the business of trading. Barry Austin/Photodisc/Getty Images

"The market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, "Swing, you bum!" 

-Warren Buffet

On the surface, many traders have a strong distaste to being compared to the gamblers in Las Vegas, Macau, Dubai or any other designated gambling destination in the world. However, the similarities are incredible and can also help you get to the core of trading success.

Trading is simply a vehicle to generate cash flow just like a business but understanding the business of gambling can help you understand the business of trading. 

Trading Is Like Gambling

When it comes down to trading any market, you're dealing with odds. We've looked at situations like the Canadian Dollar or Emerging Markets which had a favorable economic picture with which you could buy a stronger currency like the British Pound or Euro. By taking that simple example of weak commodity currencies or emerging markets in early 2014, the odds were tilted, but not guaranteed, for a trade that took advantage of that imbalance in the market. 

As you may know, if you've gambled yourself, many people who visit casino's step up to a table to play a game with money on the line and try and earn back their costs for the hotel or flight. However, the massive casino that they've stepped into was built with the money lost by people before them who didn't understand the odds that the casino that hosts the game makes sure the odds are tilted in their favor.

 Therefore, to transform from a trader that loses money, you must look at how to tilt the odds in your favor like the casino does for their benefit. 

Improving Your Odds to Trading, Just Like a Casino Does

If you walked up to two people and asked, is gambling a profitable business? You'd likely get two different answers.

The person who doubted that gambling was a valuable and long-term method to build wealth in this example is someone with dollar signs in their eyes.  They may have figured if they could find a good system with which to place bets; they could take some money from the casino, however, after a few visits to a couple of gambling houses wound up down a few more thousand than expected after costs for the flight & hotel. 

Now, what if the other person that you asked if gambling was really a profitable business owned one of the largest casinos in Las Vegas? Do you doubt that their answer would be an emphatic, "yes!" Same question, but two different systems. So how can you take this to put the odds in your favor, just like a casino owner? 

Stacking the Odds in Your Favor like a Casino Boss

So what does a Casino boss understand that newer traders do not? Here's a starter list with their trading equivalent: 

  • Casino: They only play games that give them an edge
  • You: For optimal trading results, focus on less trades with higher probabilities
     
  • Casino: They have unwavering discipline to their risk tolerance through table limits
  • You: Maintain a focus on protecting your capital so that you can take advantage of your edge
     
  • Casino: Focus on the overall profitability of the casino by keeping the casino open 24-hours a day
  • You: Know that each trade is one of a thousand insignificant trades to build your career

Closing Thoughts

Trading and gambling are very similar. However, to benefit from the similarities you must increase your odds and think like a Casino boss. The best way to trade like a casino operates is to focus on fewer trades that align with your edge and having lower volatility of performance by keeping a disciplined approach to money management so that you don't take a significant drop in your trading progress.

Lastly, you should continue to take the long-view of your trading career so that you do not put too much weight on any one trade which often results in overtrading or trading too large of a position for your account equity.

 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.