Trading and Gambling, What's the Difference?

Last week I spent 2 days at Caesars Palace in Las Vegas, giving a couple lectures at the Money Show. Most people do not like to mix the words trading and gambling. For many, this somehow gives the impression that trading is like some secret poker game in someone’s basement, a dark alley game of dice, or weekend trip to Las Vegas. While these three examples may not sound glamorous, they all share the important aspects of trading. Whether you are playing a poker game for money, trading one of the various markets we trade, or Pepsi buying commercial time on television, money is being put at risk with the intention of a desirable return on that investment. In any of these examples, there is no certainty, there is only the opportunity for better odds and the astute trader (market speculator) knows this. Even Pepsi does not know what kind of return they will get when they buy commercial time on a network. They have an idea but they never know the exact return, it is a gamble.

You see, when you keep it real and understand that trading is gambling, you will then understand that it is the ultimate form of gambling. It happens to be the type of gambling where we the trader can STACK the odds in our favor, much better than you can in Vegas or even the casino for that matter. Imagine you are playing a card game in Vegas only this time, you can decide whether you want to put your money down on the table AFTER you see your cards and the dealer’s cards and also bet as much money as you like on this hand. That’s trading my friends and that’s why it is the premier form of speculating on the planet. I have a friend who always tells me that the trading I do is just gambling and I tell him he is right only that it happens to be the type of gambling where you can absolutely stack the odds in your favor. Caesars Palace, Mandalay bay, and the others don’t enjoy the odds we are able to attain in trading. The key is to follow your plan just like Vegas does and keep the losses small and the gains larger.

Trading with objective supply and demand analysis, we have the ability to clearly determine probability, risk, and reward and only put my money at risk when the odds are stacked in our favor. Here is an example:

When to sell:

A rally in price to supply (retail)

Odds enhancer:

1) Properly located on the larger time frame supply / demand curve

2) With a substantial profit margin of at least 3:1 (reward/risk)

3)  A quality supply level

a. Song decline in price from supply suggesting a big supply/demand imbalance

b. A supply level that has not been retested yet which offers the greatest odds

4) Is the rally in price to supply a stair step rally suggesting a low odds sell or is the rally a strong rally in price to supply suggesting a much higher odds selling opportunity

Each odds enhancer increases the probability of your potential bet (and there are more quality odds enhancers). After objectively assessing your odds based on the setup you see on your chart, you can then decide how much of your capital you want to risk on the trade (bet). Vegas would LOVE to have these odds but they don’t come close. The one thing Vegas does however that brings them consistent riches is that they don’t change their rules when they lose. They know they are going to lose money every day but at the end of the day, they almost always come out ahead with profits. They have a system that tilts the odds in their favor so they know that all they have to do is stick to the plan and they will profit. Imagine if they became emotional and changed the rules each time they lost. If they did that, they would not enjoy the profits that they do.

Let’s take a look at a trade from last week I was able to take from our supply/demand grid. The grid identified an objective supply level (black box). This supply had a few key Odds Enhancers suggesting a low risk, high reward, and high probability selling opportunity when price rallied back to that level. A short time later, price rallied to that level meaning someone was buying at that supply level. This is where the trade (bet, gamble, speculation) takes place. The buyer is betting that price will rise and the seller is betting that price will decline. Call it a trade, bet, or whatever, they are all exactly the same thing. As the seller, we know the odds are stacked in our favor, obviously the buyer doesn’t or they would not be buying at that supply level. By being very disciplined in our strategy rules and Odds Enhancers, we are essentially doing the same thing as Vegas. The key for us is to not change any rules and don’t think.

Income Trade Nov. 19, 2013

Price declined strong off that level which meant profits for the seller and losses for the buyer, this is what makes a market (and a casino).

With the ability you have in trading markets, make sure you have a set of rules that stack the odds in your favor. If you don’t have that set of rules, don’t trade because you are competing with traders who do and you will very likely lose. Once you have that set of objective and mechanical rules that help stack the odds in your favor, make sure you stick to it and understand you will still have losses sometimes but that’s ok, think of the casino and all the times they lose in a day. Remember, in trading, gambling, speculating or whatever you chose to call it, the one thing that is certain is the lack of 100% certainty with each individual outcome. Instead of searching for certainty, become a part of the astute trading community that only searches for better odds. And lastly, understand that trading, like gambling is certainly not for everyone.

Hope this was helpful, have a great day.

Learn to Trade Now