This is a topic about which there appears to be a tremendous amount of confusion. I have spend more than a small amount of time thinking and reflecting on this topic as well. These are my thoughts and reflections.
Is there a difference and if there is, what is that difference? Is there a grey area in between? Both trading (the term "speculation" can be used interchangeably) and gambling imply risk to capital. Risk exists in the very act of living. Here are my starting definitions and a signpost to the potential difference between the two:
A speculator seeks to take advantage of risk that is already in existence. He does not create the risk.
A gambler creates the risk. Without action on the part of the gambler, the risk does not exist.
Here is another potential difference. The speculator makes a trading decision based some type of analysis and can modify his risk and capital committed to the trade through time. The gambler, however, once the bet is placed, is now an observer and the rules of the game now control the outcome.
There are many games of chance. A professional poker player may actually approach trader status. He plays with a definable edge and I consider poker to be a game of skill. For the purposes of illustration of the differences between trading and gambling, I will use the game of blackjack in a casino setting.
The blackjack player's first decision is the size of his bet. A trader makes the same decision as to trade size. The dealer deals you your first card. You can do nothing. This is the equivalent of a price move to a trader and he can then re-evaluate his position. He can exit, he can increase his size, etc. Dealer finishes the deal. You now know what your hand is and half the hand of the dealer. Now the blackjack player has decisions to make. He can hit, stand, double down and split his cards. He can also choose (if rules allow) to surrender half his bet. These are also the equivalent of price moves in a trade. Now, the dealer has dealt you a blackjack, can you increase your bet to the total size of your bankroll? Of course you cannot. A trader could!
Now let us examen expectancy of outcomes. A trader has a perceived edge when entering a trade. It is developed over time using the same trading setup. Does the trader know the outcome of the trade? Of course he does not. However, he CAN know the outcome over a large population of trades using the same setup with the trades all executed in the same manner (discipline). Does the blackjack player know the outcome of the hand in advance? Of course not. Neither does the casino. The casino could not care less about the outcome of your hand either.
They are playing thousands of hands and the casino has the edge. Their edge is that you have to make decisions before the casino does. You lose your hand by busting out and the casino busts out as well, the casino already has your money. There is no equivalent of this when trading. Can the casino's edge be overcome? Yes it can but only by applying a very high level of skill. In days past, you could count cards. The casinos have employed counter measures and there is no longer an edge counting cards. However, advanced shuffle tracking methodology CAN give you an edge. This is the same as trading then in some respects. A highly developed skill set can overcome the beginning negative expectancy in a trade which is the spread between bid and asked and the commission for the trade. You begin each trade negative.
When does trading become gambling? There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line. I love Jeff Foxworthy so I will steal his "you just might be a redneck."
1. IF you enter trades without a clear trading plan, you just might be a gambler.
2. IF you trade just to be trading, you just might be a gambler.
3. IF your bored and enter a trade, you just might be a gambler.
4. IF you look at potential profit before assessing potential loses, you just might be a gambler.
5. IF you have no impulse control, you just might be a gambler.
6. IF you have no methodology, you just might be a gambler.
7. IF you rely on others for your trading decisions, you just might be a gambler.
8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.
9. IF you increase your risk due to losses, you just might be a gambler.
10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.
And my all time favorite
11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.
In summation I would like to say that I do enjoy casino gambling as a form of entertainment. I strive to over come the house's edge when I do gamble. Gambling is entertainment and trading is a business and should be approached as a business enterprise. IF your using the markets as a gambling outlet, be my guest. Traders that approach trading with a positive expectancy WILL take all your money. They will send you stumbling out into the night, cross-eyed and mumbling to yourself. Be smart. You can either feed the trading gods or feed your head. Do the work and get educated before risking one thin dime. Employ laser like focus in your trading and use iron discipline. The end result can be well beyond your wildest expectation.
