How Day Trading Is Like Gambling

I‘ve made the unfortunate error of comparing what a few acquaintances do as day traders to what professional gamblers do.

And I drew the comparison without any malice.

Yet, my stock slinging friends were offended. This struck me as odd because the similarities are obvious. Understanding these similarities will likely help you succeed in day trading. I want to mark a clear difference between trading and investing. Investing is a long-term tool for securing future financial security.

Trading is used to create short-term cash flows.

If you can grasp the business of gambling it will help you have a better grasp on the business of day trading.

Here’s exactly how day trading is like gambling.

Odds and Probability

The first thing to understand is that you’re constantly dealing with odds and probabilities. Regardless of what market conditions are, you can find favorable situations on things like currency exchanges. You may also leverage burgeoning markets with a giant growth potential to acquire a stronger commodity.

In a weak commodity market, the odds will likely be in your favor. But you aren’t guaranteed a huge return, in spite of the imbalance in the market. Have you ever stepped onto a casino floor and exchanged your cash for chips at one of the tables? Then you are familiar with the idea of laying your money on the line to cover your travel costs or accommodations.

Of course, the giant monument to overindulgence known as Las Vegas wasn’t built on the backs of winners. No, the casinos understand something many doe-eyed visitors overlook. The casinos take special care to ensure that the odds are tilted in their favor.

If you want to evolve from a trader who is losing money into a profitable trader, you’ve got to learn how to tilt the odds in your favor.

Probably the biggest difference between day trading and real money gambling is your assumed negative return. You’re smart enough to understand that when you go gambling at a casino, you’ll leave money there more often than not.

After all, the house always wins in the long run. If you want to position yourself as the house, which every trader should, it just requires some skill. The most beautiful thing about the casinos is they always come out ahead in the long term.

Tilting the Odds in Your Favor

If you surveyed 10 people walking down the street and asked if gambling is a profitable business, you’d obviously get 2 answers:

Yes or no.

But you may be surprised at how many yeses you got. There’d be a no or 2 — no doubt. And that’s probably true for those individuals. They may never gamble or not have ever really thought much about the business of gambling. Then you’ll have the “yes” crowd. Unfortunately, many of them will be foaming at the mouth imagining their millions.

Of course, they just need that inside trick or tip on a big event. Maybe they just need the right system to come along, or they need to improve their card counting skills. Regardless, after any considerable amount of time, those yeses would turn into nos.

They’d end up going further into the hole and end up down thousands after accounting for all travel expenses.

What about the remaining yes men?

Perhaps 1 of the 20 worked for a casino, possibly Steve Wynn fell into your pool. He’d know the answer is yes; he built an empire in the gambling business. So how can you put the odds in your favor just like a casino owner?

Be the House

Casinos operate under one principle: They will not offer a game if the odds aren’t favorable for the house.

The same principle applies to successful day traders. You must take the trades that provide the highest odds of a profit. Casinos build value by having a strict minimum and maximum bet amounts. Without these in place, some gamblers’ values would be too low. The juice wouldn’t be worth the squeeze.

However, if the bet sizes got too big, casinos could be in jeopardy of a huge bet delivering a painful strike to their profits. Imagine an online sportbook with $1 million on each side of a contest — it knows that no matter the outcome, it will have a decent payday.

However, if a whale comes along and drops $1.5 million on one side, and the result goes in their favor, it can make for a lousy week for the sportsbook — possibly even wiping out all other profits. Accordingly, to limit the possible devastation, casinos will usually look to cap bet size.

For day traders, you should never bet too much on any particular transaction no matter how confident you feel. Unfortunately, you always run a risk that the trade goes against you.

To succeed, you mitigate that risk.

If you’ve spent much time at all gambling, you’re familiar with bankroll management. For day traders, this is your basic capital preservation. Your long-term goals should be leveraging those favorable risk/reward opportunities. You shouldn’t go all-in on any one transaction — no more than a gambler should walk into the casino with their entire $20,000 bankroll, saddle up to the roulette wheel and bet on 1-12. Sure, you could win 2 to 1, but you’re in danger of going broke.

The casinos also take painstaking measures to maximize revenue streams and profitability. By offering casino bonuses and essentially being open for business around the clock every day of the year, they keep the wallets walking through the door.

Translating this for day traders would mean focusing on how a lot of trades — thousands, over the long haul — will determine your valuation. A small selection could skew things one way or another.

The Average Day Trader Versus the Average Casino Boss

So how do the average day trader and casino boss overlap? We already know that the casinos only play where they have the advantage. Successful day traders also know to focus on fewer trades where they find higher potential. Casinos have a Buddhist Monk-like discipline for minimizing risk through table limits.

The disciplined day trader maintains a Buddhist Monk-like focus on protecting their capital in order to leverage their edge.

The casino places a clear emphasis on overall profitability by keeping butts in the chairs 24/7. Day traders in the black understand how each individual transaction is only one of thousands in building a successful and sustainable income.

Some Food for Thought

The similarities between day trading and gambling are clear. To take advantage of the similarities, you must improve your odds. One way to implement this is by beginning to think like a casino boss.

The most successful day traders know that to operate like a casino boss means to focus on fewer trades. This smaller batch of transactions aligns with the trader’s edge and has a lower volatility. In keeping a tight approach to capital discipline, they negate any significant drop in their trading progression.

Finally, day traders that are most profitable and overall happier with their financial betting performance look at things long term. This means they don’t place too much stock in the results of any single trade. Over-trading often leads to placing their account equity in peril.

It’s just like a sportsbook. They’d never allow a disproportionate bet on any single contest.

Conclusion

Is day trading gambling?

Not exactly.

The two are similar in a number of ways though. If you are randomly shifting money between markets on even probability trades or loosely trading, you are probably giving away money. This reminds me of the millions of casino gamblers that make their annual pilgrimage to the desert and haphazardly place uninformed wagers.

Even most casino gamblers are only at worst an 8% underdog. So then, how do so many manage to lose their entire bankroll in a relatively short period of time? It’s because they are exercising poor risk management, and they continue to throw good money after bad.

I suggest any day traders take a page from the casino owner playbook and start to improve those returns.