They say that 95% of traders lose money. Therefore, 5% make money. If this is true, then........
Trader "A" is among the 95% losers.
Trader "B" is among the 5% that make money.
Trader "A" is gambling. He is not advanced enough as a trader to make profit. Therefore, every trade he makes is a gamble. The odds are against him, just like when anyone walks into a casino (with the exception of a few games where one can gain an edge.)
Trader "B" is not a gambler, but a businessman. He is similar to a Casino owner. He has an edge and successfully applies it for profit. In essence, the Market is his own personal casino.
So, in response to the question.
If you lose money consistently as a trader, you are a gambler. If you don't have an edge, you are gambling.
If you gain money consistently as a trader, you are a businessman. If you have an edge, you are acting like a casino operator or an insurance company. A business.
Actually, I disagree. There are two extra disadvantages of being a speculative trader as compared to a professional gambler, namely model risk and information asymmetry.
You cannot get the rules of a game of blackjack, roulette or poker wrong. There is nothing preventing you from extracting the rational decision model. You could still make a mistake with your model, but the problem lies with you; a statistically valid model will yield predictive value. On the other hand, a statistically valid model in trading often finds itself unable to predict the outcomes in trading, even if you had a rational player (computer) trained with that model.
As for information asymmetry: Say in a game of poker, you can never see your opponents' cards, nor can they see yours. You could make a mistake and accidentally give away an expression giving biased information about your cards, but if you made computers play against each other, this wouldn't happen. In contrast, you can get about 6.5 ms delay on the retail consolidated feed, during which it is possible to lure you to place a market order expecting an offer price that doesn't exist by the time your order is transmitted to your broker and passes margin control (~2.0ms).
Maybe I'm wrong, What are the odds of being a professional gambler after a year? It would be interesting if we could have two test groups with traders and gamblers. You could give them both the same amount of money and time.
Trading is a game of chance with an uncertain outcome so I'd say trading is gambling. Bear in mind once you put on the trade any news even the smallest piece can move the market so you have no control over the outcome no matter how good your system.
The problem is many trader's overrate their abilities and believe they have an edge which in many cases is non-existent hence the theory 95% lose. Once you take into account transaction costs the deck is so far stacked against the trader, it's almost impossible to make money over the long term.
I think trading can be compared to blackjack which I play occasionally. Like blackjack you make decisions on uncertain outcomes. With blackjack you have a possible edge if you understand the probabilities of what is left in the remainder of the deck.
I know exactly what to do when I see a dealer's card, hit, double down etc. This is nothing more than basic strategy that most blackjack players know. They say if you know this basic Blackjack strategy then the odds are only 0.8% in the favor of the house.
Once you take into commissions and slippage I'd guess the average trader is giving away 10% per annum to the house (broker/market maker). This is quite a bit worse than the 0.8% on the blackjack table.
I'd say there are blackjack players that have an edge, counting cards etc putting the odds in their favor. In fact I knew a guy who used to play blackjack professionally and got banned from many casinos mainly because he was winning too much. He told me casinos are fairly quick to shut down consistent blackjack winners because they know it doesn't take much to turn the odds away from them to the gambler. Of course they will let roulette players go all night long because eventually they will lose all of their money as the odds are 6% in the favor of the house on an American style roulette wheel.
Roulette players are a little like traders. They see 5 reds in a row and say it must be a black next so I'm going to load up the boat. Similar to a trader who has seen support hit 3 times and says it always breaks through on the 4th attempt....No wonder most traders lose all their money....
Last edited by djkiwi; November 4th, 2012 at 12:37 AM.
We know the rules of a Blackjack game before we sit down to play. Therefore if there are legitimate mathematical strategies that will beat the game (and we are capable of playing them) --- we are NOT gambling at all and will be assured of a win over the long run.
Unfortunately, the markets do not post the rules when we sit down to trade. Therefore, we have no way to calculate a winning definite strategy.
So yes -- trading is ABSOLUTELY gambling. Because you can never know if you are playing a correct winning strategy going forward. Attempting to pick-out pseudo patterns from the past and playing them going forward is tempting -- and they can even give the *appearance* of working over surprising long periods of time in some cases -- but that is all they are.
If you've been lucky enough to win the lottery, I wouldn't advise plowing your winnings back into it on the belief that you have discovered some rare predictory power. It will be definitely very dangerous to your wealth. Instead, I'd recommend selling *advice*.
And most importantly, being known as a 'gamber' sounds much more anti-social at cocktail parties and family reunions -- which is something we should all strive for.