Gambling versus a Calculated Financial Risk

Is Stock Trading Gambling?

There is a fine line between trading and gambling. Do you know the difference?

When you are trading in the stock market you are taking a financial risk. You weigh the odds of losing a predetermined amount of cash versus the odds of winning. When the odds are in your favor then you trade the stock. 

When you bet, generally you either win or lose. If you place a wager of $1,000 at the table in Las Vegas or on a horse and you lose, you lose $1,000. Consider a slot machine. When you play a $10 slot machine which require 5 stars to win and you get 4 stars you lose the $10. It is either a win or a loss, there is no between

When trading properly, prior to placing a trade, you should have identified your exit strategy. This will be a price at which you will exit the trade when it goes against you. This can be done by either making a mental note of the price you will get out at or by entering a stop loss order. A stop loss order is a price where the stockbroker will automatically sell your stock if the price is reached.

When you buy 100 shares of a $10 stock, it will cost you a $1,000. When you set a stop loss order at $9.49 and the stock price goes against you, your stop is hit, you will have $949 (provided there is no slippage) minus commission or around $945 left. In this case you lost but still have 94.5% of your capital versus 0% when you bet.

Since all traders are betting that the stock they buy is going to go in their favor, one could generalize and say all traders are gamblers.

There is nothing the average trader can do to influence the direction of a stock. If you cannot influence the direction the stock takes, then you are betting on the direction.

Use proper money management techniques and turn your wager into a trade.

If you think you are gambling on too many of your trades you may want to read some of the books summarized in our self-help section which may help you with this challenge.

Stock Trading vs Gambling

In a losing situation, the end result of the gamble and trade are the same, a loss of $808. However, while you have no influence on either outcome, you can obtain information of a trade which could, over a number of trades, give you a higher probability of a win vs a 50/50 chance.

In the ATS.TO example, consider that there is a divergence between both the MACD line and MACD histogram. The price has also reached the Keltner channel lower band which does not happen that often and finally, you are buying on a higher high with a stop loss point below the last low. The buy point is also a green bar within the Elder Impulse system. All of these clues point to a positive outcome vs a negative outcome.

So, is stock trading gambling? I still think yes but the trader has the ability to only take higher probability trades vs the gambler. Although, I have met some professional gamblers who make a living out of gambling. So there appears that for some gamblers, they have mastered their trade.

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