Well trading isn’t very prevalent profession in some parts of the world and even when some hear about the word trading then the gambling image comes in their mind. Although trading and gambling are the both two different words which has different meanings. Meanwhile both involves money, risk and uncertainty that’s why people co-relate both the terms. However in today’s article i’m gonna tell how trading and gambling are both two different terms and with different meanings. Understand one by one, let’s start with trading.
Trading
Trading includes the buying and selling of any instrument or pairs through the broker. Although trading involves different market such as crypto market, stocks market, forex market, derivative market and commodities market. If you want to know more about the markets then you can check out my previous blog on How To Start Trading? There i have explained the every functions of the different markets and different time zones of different markets. However trading involves analysis, predetermined set of rules, per trade risk, maximum daily loss limit and fixed trading hours. Meanwhile trading requires the basic understanding of fundamental concepts, macro and micro economic factors and etc.
Gambling
Gambling involves the risking money to the at the uncertain event in the hope of double the betting amount or at least some additional amount against the betting amount. Meanwhile it doesn’t include any analysis, rules or any market. Although there are some types of gambling are present in the market such as casino games, sports betting, poker and card games. However gambling involves the emotional decision over the analytical decision, no risk management and only focuses on quick profits until they end up blowing their entire trading capital.
Why Many Beginners Treat Trading Like Gambling
Most of the beginner trader thinks that this is the fastest way to make easy money but it is the hardest way to make easy money. Well it’s not their fault to treat trading like gambling because in some parts of the worlds, people has negative perception towards it. Beginner trader’s want faster result through the trading and they ignore the risk management, position sizing and execute the trades at the random zones. In the hope of doubling the amount in a single night they start risking their entire capital on the single trade. They trade without the plan and try to capture the every move, every breakdown and breakout and wants to trade until the market remains open.
The Importance of Risk Management
Risk management is one of the major things which separates the trading from gambling. Where gamblers risk their entire capital behind the one trade, trading involves the predetermined risk before entering into the any position. The risk management keep your losses at the minimum and protects your capital from getting wiped out. The risk management accepts the uncertainty and helps you to survive in the long term. Risk management is one of major edge of pro traders to keep themselves alive in the market.
Emotional Decisions vs Strategic Decisions
Emotional decision: In the most of the scenario gambling involves emotional decisions because here people deals with excitement, greed, revenge and frustration. It is often influenced by our current state of mind. A gambler always has recovery mindset, an it leads him to chase the loss after a loss. Emotional decision creates fomo which activates the revenge mode and ends up blowing the whole capital.
Strategic Decisions: Strategic decisions involves the decision making according to the strategy. The trading includes the analytical decision where a trader has clear set of trading rules, understanding of economical as well as fundamental factors. In trading a trader always deal with the uncertainty with the help of risk management or you can say with a stop loss.
Probability and Long-Term Thinking
Although both trading and gambling is probability game but how the trading and gambling are two different terms in game of probability and long term thinking, we will discuss below;
How Trading Deals With Probability and Long-Term Thinking
Well in the trading or in the real life there is always the 50%-50% probability of something will happen or not. But still we prepare ourselves for both the situation. Same goes in trading also, if market goes against us then we have stop loss to protect our capital. On the other hand if market moves in our favor then we have target price. By putting the stop loss in our trade, we give ourselves some sort of comfort zone that if this trade doesn’t work out then we have the capital or funds to move on to next trade. Stop loss helps traders to survive in the market and think for a long term perspective.
How Gambling Deals With Probability and Long-Term Thinking
Although gambling is also the game of probabilities but here the gamblers doesn’t think about the probabilities, they only care about the how can win i right now and quickly. Well gambling doesn’t includes, how to deal with the uncertainties and there is no long term thinking of the gamblers. The gamblers only thinks if i bet more, i’ll get more, that’s where the probability and long term thinking ends. However the gamblers always deal with the revenge mode and fomo, which separates gamblers from the traders.
Signs You Are Gambling Instead of Trading
There are some signs which indicates you are treating trading like a gambling:
No Analysis: When you try to predict the price, execute your trades at the random levels and trade without the proper trading rules.
Increase In Lot Sizing: Just after a loss you enter in the revenge mode instead of standard lot size that you use, you executed the trade with 2 or 3x more lost size, in the end they blow their funds.
Chasing Losses: Placing trades without the stop loss, ignoring the risk management, forcing the set up when there is no clear set up, overtrading, fomo entries and etc.
However these are the some signs which tell whether you are trading or gambling.
How Traders Can Avoid a Gambling Mindset
- Following the proper set of trading rules
- Stick to you risk management
- Always do pre-market analysis and post-market analysis to improve your trade and set up quality
- Journal your trades, write emotions behind the trade, mistake behind the trade if you have done it, why did you trade there was any level or set up trade on or just traded randomly and risk to reward ratio etc.
- Accept losses as a part of you trading, if you don’t accept the losses eventually you will end up doing overtrading and revenge trading.
- Develop Consistency, instead of jumping to the strategies focus on one strategy and try to take 100 trade on a single strategy. It will help you to maintain the consistency and develop the focus.
Final Conclusion
Although both the terms trading and gambling has the some sort of similar context when it comes to the financial risk and uncertainties. But the approach behind both of them separates both the terms from one another.
Gambling chases excitement and emotional decision making. Whereas trading involves strategic decision and a proper clear plan of action.
In the end successful trading is about taking smart decisions with calculated risks.
If you want to know why patience is required in trading, then you can checkout my previous post Why Patience Is The Biggest Edge In Trading