If you are not directly involved with trading or have familiarity with the methods that traders use for making buy/sell decisions, the profits or losses that result from trading might appear eerily similar to gambling. However, no matter how similar they may appear on the surface, there are fundamental reasons why traders are not professional gamblers.
Traders are not professional gamblers. Professional gamblers, even highly disciplined ones, do not display the same level of emotional neutrality and degree of risk management as experienced professional traders do.
This article will cover the main reasons why traders and professional gamblers are different. It will also help to clarify why some apparent similarities between gamblers and traders are, in fact, clear distinctions between both.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How are Trading and Gambling Similar?
To properly appreciate the essential distinctions between traders and professional gamblers, it is first necessary to note their surface similarities.
Both are inherently involved in taking on an amount of risk for an expected reward. Likewise, any gambler or trader that intends on having any possibility of success needs to be disciplined. Additionally, both formulate and apply strategies to improve their upside potential.
In this comparison, we discard non-professional gamblers—those who lack all discipline—who are impulsive and prone to become compulsive. These “loose cannon” gamblers may share a lot with undisciplined traders who have a “get rich quick” mentality but not with disciplined and experienced traders—the ones who are successful at trading over the long-term.
4 Key Differences Between Successful Traders and Professional Gamblers
If successful traders and professional gamblers seemingly share certain similarities, then how are they different?
The difference comes in that while a successful trader and a professional gambler may share certain traits such as risk tolerance and strategic planning in common; how, when, and to what purpose they deploy their skills is where the differences between them become apparent.
Traders and Professional Gamblers Deal Differently With the Element of Chance
Chance is defined as the “unpredictable element in happenings that seems to have no assignable cause.” Another way to look at chance is by seeing it as all that happens for which you have no control or say in the matter.
In gambling and trading, the element of chance is ever-present. Both successful traders and professional gamblers do their best to mitigate chance. However, in both cases, it is impossible to remove the element of chance altogether.
Traders face chance in the form of unpredictable events taking place on the world stage that impact a stock’s price. However, the events that can truly be defined as “unpredictable” in the trading realm are few and far between. A profitable trader is conscious of how unpredictability can affect his performance. Therefore, profitable traders take steps to mitigate the impact of chance by anticipating what could negatively impact their position.
These traders hedge their positions, apply stop losses, diversify their portfolios, etc. Essentially, traders use methods to protect themselves from unexpected losses brought about by chance, not by pondering every negative possibility. Instead, they do so by applying proactive preventative actions that curtail the amount of the negative impact.
Professional gamblers do not have the opportunity to react in the same manner. As methodical as they may be, as strategic as their focus is, chance in gambling is far more random than in trading. As a result, even the most disciplined professional gamblers enter situations where the “unknown” cannot be mitigated sufficiently—at least not to the extent that it can in the world of trading. Gamblers are forced to “play things out” more frequently.
Provided that they apply a comprehensive trading strategy that considers the unpredictable, traders do not have to face such perils the way professional gamblers do.
The result of this is that traders can factor in “chance” at the strategic level, while professional gamblers must deal with it randomly at both the tactical and strategic levels.
Traders Follow a Knowledge First Approach
Due to the difference in which traders and gamblers handle chance, traders take a “knowledge first” approach nearly every time they enter or exit a position. Gamblers, unfortunately, do not have that luxury. They have to rely on assumptions and intuition more often than traders.
It would be wrong to believe that intuitiveness is not a beneficial trait for a trader to have. However, intuition in trading is used more for analyzing information and trends. For traders, intuition is applied within an informational context. A gambler is frequently left with nothing but his instinct when placing a bet or playing a hand.
Traders can foment knowledge and deploy it with greater nuance. They can apply it within their trading strategy in a proactive and reactionary fashion. Gamblers usually only have the opportunity to use their accumulated knowledge in a reactionary manner.
Traders Are Less Prone to Consequential Behavioral Biases
By relying on the “knowledge first” approach described above, traders can also avoid behavioral biases better than professional gamblers.
It does not mean that behavioral biases do not exist in trading. Chasing trends, overconfidence, regret, and a limited analytical scope are some of the most common behavioral biases that can negatively affect a trader’s performance. Even so, for traders, these biases tend to manifest themselves more as confirmation biases. Professional gamblers tend to encounter attentional biases.
Attentional biases are more prone to lead a professional gambler to take unnecessary risks, chase losses, double down, etc. As a result, these attentional biases can lead gamblers to a compulsive series of poor decision making that can become pathological.
On the other hand, confirmation biases tend to result in a “burst bubble” reaction from traders. It makes it easier for traders to detect them and modify their behavior accordingly. The result of this is fewer instances of poor decision making for traders as opposed to professional gamblers.
Traders Are More Methodical With Money Management
Money management is something that both traders and professional gamblers have in common. To an extent, both apply highly systematic approaches to money management. In trading, this can start with strict rules regarding what percentage of your trading capital can be tied up in a single trade. In the gambling world, the parallel to this would be establishing a maximum outlay per bet.
The problem for professional gamblers is that they have to face the “house advantage.” Also known as the “house edge,” this is the average loss ratio compared to the average initial bet. This edge is what fuels the saying, “the house always wins.” Over the long-haul, the house advantage dictates what the house will earn.
Even when armed with methodical and complex money management strategies, professional gamblers will have to face the conundrum of putting money at risk in a system with an inherently negative expectation. In other words, gamblers have to structure their money management with a mentality geared at staying alive.
In gambling, the loss is the only outcome that can be guaranteed. As such, money management for gamblers involves trying to stay ahead of the “house edge” by pacing and sizing their bets following the perceived short-term fluctuations with the edge itself.
In trading, there is no such built-in “house advantage.” When money management is applied in the trading world, the focus can be directed entirely at preserving capital and maximizing profit based on market conditions and the trading strategy’s performance.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Successful traders and professional gamblers have some surface similarities. However, this does not imply that a trader is a professional gambler. Both place capital at risk for an expected reward, but there are underlying differences in how their outcomes are dictated.
These differences, in turn, allow a trader to be less prone to emotional and behavioral biases. It also allows traders to focus their strategies on a neutral playing field compared to one with an inherent expectation of losing.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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