Is Financial Trading Like A Night In Vegas?
In my opinion. NO WAY!
I treat trading the markets as a business. Always have done.
Although I must admit, when I very first started to dabble I did buy shares in a few companies based on magazine articles and tips. Some worked out, some didn’t. But I always had a money management strategy in place. And certainly learnt since then that tips in magazines are no way to a consistently profitable approach to trading.
What Is Gambling?
Each of us will have our own ideas and definitions of what gambling is. So i’m not going to quote the dictionary or wikipedia definition. I’m going to refer you to my idea of what gambling is.
I see gambling purely as a means of entertainment only. Sure, you can get a lucky break and win considerably on the occasion but that’s all it is; the occasion. Go back to that roulette wheel time and time again and you will be extracted of your cash!
The Casino house has the edge, not you! I once read somewhere that the edge is about 4%. Using that 4% example, what I’m saying is, if $100,000 or $1 million is gambled in that casino then it, the house, will end up with 4% profit over a period of time.
I am referring to 99% or the “average” person who walks through the doors of that casino. For risk of contracting myself somewhat, I do believe that there are “professional” gamblers who can make consistent money from casinos.
What the professionals have done, is found a way of playing the game to put the odds in their favour or give themselves the edge. Playing with their edge time and time again, they are the ones to take the cash. These methods intrigue me somewhat but as they are highly frowned upon by the casinos and probably even illegal, I have never studied professional gamblers.
I would like to add, even having spent time in Las Vegas, I can honestly say, I did not spend a penny in the casinos – only in their amazing buffet restaurants!
I knew the odds weren’t in my favour so wasn’t about to waste the cash. My money is better spent on entertainment elsewhere.
How Does Trading Differ From Gambling?
Ultimately, to be consistently profitable trading the markets, you have to have an edge. These edges come in all shapes and forms but unless the odds of winning are in your favour you won’t make money month after month, year after year.
When I design and build a trading strategy, there are characteristics I need to know before I can trade it. Going in depth of how to design a strategy is for another blog post but for the sake of this article, a few things I know are:
- Percentage win rate
- Average win size
- Average loss size
Knowing these statistics (and others not listed) can help me trade a strategy effectively. To keep things simple, let’s say that on average, my percentage win rate is 70%. So after 100 trades taken, 70 will be winners and 30 losers. And let’s say the win size and loss size are equal.
What this means then, is if I was to risk $100 on each trade and took 100 trades, 70 of those would be winners, so profit of 70X$100 = $7000 and 30 of those would be losers, so a loss of 30X$100 = $3000.
At the end of a large enough sample size like the 100 trades, I would have profits of $7000 minus losses of $3000 to total an overall profit of $4000.
This is what’s simply known as having an edge. If I was to trade that strategy time and time again, I would always end up with profit in the long run.
In fact it can be expressed that profit is equal to $7000-$3000 = $4000
$4000/100 trades equals 40.
40 divided by the amount risked $100 = profit of 0.4 of the money risked per trade. (also known as trade expectancy)
To Summarise
To be consistently profitable in the long run, whether trading or gambling, you have to have an edge.
When you gamble, as I see it, you do not have the edge. The Casino does. They are the ones winning. You lose.
However, financial trading strategies can be designed to give you, the trader, the edge. It’s then down to you to execute the trades effectively to give yourself consistent profits.
I hope you’ve enjoyed this article, I realise it is pretty personal and opinion based with regards to the gambling and even trading with an edge. But it’s opinions based on my experience of years trading the markets.
I would love to hear about your opinions and views on trading strategies or even gambling. Leave a comment or question below or email me at jarrod@thetransparenttrader.com. Please share the article on your social sites and connect with me on Facebook and Twitter by clicking the icons at the top and bottom of the page. Thanks for reading.
Jarrod