March 18, 2021

Is day trading like gambling

Roll the dice!

One popular misconception that constantly trails discussions about day trading is that it is similar to gambling. Contrary to widespread myth on the subject, day trading is not the same as gambling. However, they both have something in common risk. While gambling exposes you to the risks of losing all your money without any form of protection if the odds go against you, day trading gives you control over your investments by allowing you to manage the risks to whatever level you want.

Unlike gambling, day trading evens the odds in your favor instead of stacking the odds against you. To help you understand the difference between gambling and day trading, you need to understand how day trading works.

What is day trading?

Not to bore you with technical jargon, day trading is a trading style where you trade as many financial instruments as you want during trading sessions and close all your positions the same day. As such, you don’t carry trades over to the next day or hold positions overnight.

As a day trader, you are always on the lookout for opportunities in the financial markets and capitalize on slight movements. As much, day traders don’t react to every market movement; instead, they only raise a finger or move a muscle when they spot a profitable move with high returns before the end of the trading day.

Having mentioned all of that, you won’t be wrong to say that day traders take advantage of short-term price discrepancies. For virtually all-day traders, it’s all about compounding the small wins. More like the little drops that turn into an ocean.

To be a successful trader, one must be quick to react to opportunities and also know when to sit on his/her hands. You also have to be familiar with market dynamics and be proactive in discerning every market movement. This may sound like rocket science to most people, but it’s a skill one can learn. It only takes commitment and discipline.

Gambling is nothing but luck

As we mentioned earlier, trading is not a game of chance like gambling. Unlike gambling, whatever decision a trader makes is based on market analysis both technical and fundamental analysis.

While a trader takes calculated risks based on the outcome of his analysis and trading plan, a gambler stakes his money in hopes of payoff if a random event occurs. While the odds are always against the gambler and mostly in favor of the house, gamblers continue to bet on events with hopes that one lucky winner will compensate for all their losses. However, the likelihood of that happening is also thin. As such, a gambler could continue on an endless streak of losses, whereas a trader can take time out to backtest his strategy and fine-tune their trade execution techniques.

Are you investing or gambling?

Considering that many traders gamble without knowing it, it is easy to understand why most people think of gambling whenever trading is mentioned. As we hinted earlier, gambling involves staking on contingency. So, if you are trading based on fun or the excitement of it with disregard for methodology, what you are doing can best be described as trading in a gambling style.

Another trait of gambling tendencies in trading is when a trader refuses to acknowledge losses as part of the process. Traders who come into the market with a must-win attitude will mostly hang on to losing until they lose all they have. And that’s a major trait of gambling.

Hidden gambling tendencies in trading

The motive for executing trades is arguably the best and most popular means of determining whether you are gambling in your trades or not. If one can understand the motive for every trading decision, it becomes much easier to change how you make decisions in the future.

Speaking of trading motives, one such motive that continues to impact traders at all levels, whether newbies or pros is social proof. It’s not unusual to find people who have no interest in trading getting involved in the financial markets. Such people get involved in trading because of social pressure to show off or to feel in a social circle.

With the financial markets getting increasingly popular and closer to the people, there has been so much buzz about the bulls and bears, and more people feel the need to be a part of the conversation by investing or trading so as not to be left out. Think social proofing.

While knowingly executing trades to appease social pressure is not considered gambling, doing so without any knowledge of investing is gambling. The financial market is impacted by so many factors, and trading decisions are influenced by so many variables. Misunderstanding these variables creates a gambling scenario, and until enough knowledge is learned about overcoming the odds of losing, every trade will bear the mark of gambling. One approach to the market often determines whether you will turn out as a successful trader or continue to gamble in the financial markets.

Trading for excitement

As we mentioned earlier, trading for excitement is one of the traits of trading in a gambling style. No matter how big your wins are, losing one or two trades will always stir your emotions.

If you are trading for social proofing reasons or excitement, the chances are that you are trading in a gambling style because you’re simply following the trend and trading blindly. So, instead of following a methodical and systemic process in your trades, you end up gambling. As a trader, you will know you are gambling when you hold on to losing trades even when the market dynamics go against you when you could have followed trading methods and cut your losses.

Gambling in the financial markets is common among people who trade for the fun of it and are only out for the emotional high and the desire to be involved in all the thrills and actions the market has to offer.

Rounding off on the topic, here are the differences between a trader and a gambler.

Gamblers love the rush of trading, and they disregard leverage while trading. Gamblers trade without risk management, and they don’t treat trading as a business but rather a means to satisfy their emotions and thirst for quick money.