Many people believe that day trading is just another form of gambling. Is this true? The answer is yes, if you do not properly plan and prepare before you trade. While day trading and gambling have many similarities, they have important key differences. To understand the difference between the two, you have to know how both of these things work.
How does Day Trading Work?
Trading is the process of buying and selling stocks, or securities. Day trading is trading one or more times within the same day. Learning how to start day trading, for beginners, can seem like an opportunity to get rich quick. The truth is that is not that easy to be consistently profitable.
Day traders make money by buying and selling securities at different prices. Day traders don’t usually hold their positions for a long periods of time. The preferred goal is to take advantage of quick price movements in the market.
Traders’ opponent is the market, which is made up other traders and businesses all trying to make money. When someone makes money in the market, the money has to come from somewhere else in the market. More simply put, when a trader makes money on a trade, other trader(s) lose money.
How Does Gambling Work?
People usually are referring to slot machines, blackjack, and/or roulette when they talk about gambling. Most gambling is 100% luck, or chance based. The house, or the casino/business where you are gambling, is always designed to have an edge. This edge is a statistical advantage that they will win more than they payout. This means when you play blackjack, roulette, or slot machines, the odds are always against you.
Sports gambling is also slightly different because there is no house edge. It is is luck based, but you may be able to improve your odds with your knowledge of sports. The house, or the sportsbook, makes money off the commissions from losing bets. Another exception is live poker where you are playing against other players.
It is true there are ways to lessen the house edge through things like card counting and basic strategies. The bottom line is that house is a business and they are going to always have an edge. This doesn’t mean you can’t win big, because people do. It means the more you keep playing, the better the chance you have of losing money over time. So if you win do big, run away…fast.
Similarities and Differences of Gambling and Day Trading
- The opportunity to make money fast, may be the main reason so many people are attracted to gambling and day trading. For this reason, both can be addictive.
- They both involve risking money to make make money.
- There are people that gamble for a living, as there are those who make a living day trading.
- When gambling, players usually just play against the house (casino). However, in day trading you are trading against other traders, so trading can better to be compared to poker.
- With most gambling games, you have to play exactly to their rules. While there are basic market rules in day trading, you still have more freedom in day trading.
- You can always choose your own risk/reward ratio when day trading. With gambling, this not always the case.
The Day Trading Edge – Think Like a Casino
There is a reason that casinos consistently make money. When they make less money, it is just due to less people gambling. Casinos have figured out how to reduce and eliminate risk until they have edge. How do they do this? They examine risks, and create rules and strategies until they develop a consistent edge. Your best chance of finding an edge in market is use strategies and trading risk management to do the same.
Many traders believe that there is such thing as a traders edge. This is some secret or combination of strategies that put the odds in their favor. The reason is that markets move because of emotion, and how people think certain things are valued.
There are no real trading secrets or specific edges that work for everyone. There are few things that may be the key to helping you find your own personal edge: Studying risk/reward, testing trades to find the best trading strategies, and learning manage your own emotions.
The official definition of gambling is betting on and playing a game of chance, or taking a risky action with hopes of a desired result. As there is risk involved, day trading can be considered a risky action. It is not, however, considered a game of chance. Day traders don’t look at it as a game, they look at it as investing. When you look from afar, or even compare side by side, it is not hard to see why people believe day trading is just gambling. There are a lot of similarities, and the way some people trade is basically gambling.
Gambling is designed to be a fun experience even if you lose a little money. There are tons of shiny lights, drinks, and prizes to win. Most people probably don’t give day trading a fair chance. That is probably the reason most traders lose money. Trading takes a lot of more work to even get started in. There are many traders who quit at soon as they lose any amount of money. Either they thought it would be easier, or they realize they don’t want to put the effort in to get better.
For those people who have a decent amount of experience with both gambling and day trading, it is not as hard to see the differences. However, it can be hard to fully understand the differences until you have experienced both. The verdict is then, that day trading is gambling in a way, but then so is any investment that you make. Day trading is more like poker in the sense that there is a lot you can learn to get better, and a lot more to it than just mere chance.