The Difference Between Trading & Gambling

Trading is becoming increasingly popular and accessible. That is not surprising, because earning interest on a savings account no longer yields anything and trading is also an attractive business. But despite the popularity and wealth it builds, people still view trading as a form of gambling. However, gambling and trading are indeed different!

But what exactly is the difference between gambling and trading?

To explain that, we will first discuss what exactly gambling and trading are, then what the similarities are, and what the exact differences are. Finally, we will also explain how you can prevent yourself from gambling on the financial markets.

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What Is Gambling?

Gambling is an activity in which someone tries to predict the outcome of a particular game or competition risking money, a valuable object, or belonging in order to win money

The outcome of this game is entirely based on chance and not determined by knowledge or skill.

What Is Trading?

Trading is the process of buying and selling assets, such as stocks, crypto, commodities, or currencies. Trading can be done on an exchange, such as a stock exchange, or over-the-counter (OTC) as in currency trading.

The aim here is to respond to a predetermined price movement. People buy when they expect the price or value to rise and sell when they expect the price or value to fall again.

Often analysis is done in advance about where the market may move towards.

What Are the Similarities Between Trading & Gambling?

The similarity between the two is that in both Trading and Gambling, you are predicting an unknown thing that is happening in the future. So you can never say with 100% certainty in advance what will happen.

In addition, you also have a risk of loss in both cases. Because if your expectation does not come true, you will lose your bet.

Trading and gambling are both so-called “Zero Sum Games”, which means that there is always a winning and a losing side. Also, the sum of the winning amounts of some players equals the combined losses of the others

What Are the Differences Between Trading & Gambling?

The difference between gambling and trading is that when gambling, the casino not on gamstop determines the outcomes and in most cases puts the chance of winning more in its favor than the gamblers. Therefore, the players say “the house always wins”.

In trading, this isn't the case as you can determine your chances of winning based on your strategy.

For example, when you are at a roulette table at the casino, the casino always has an advantage over you. On a normal roulette table, there are 37 individual options to bet on. When you win, you earn 35 times your stake.

You then have a 1 in 37 chance of winning 35x your bet.

So if you bet 37 times €10, then the highest probability is that you will lose 36 bets (€360) and win 1 bet (350). So, you will lose a €10 in total.

As this example shows, the casino always wins!

When trading, you can turn this around as you have control over the probabilities. You can adjust your probabilities by changing your trading strategy and by adjusting your risk/reward ratio.

When you develop your own trading strategy and test it, you can find out whether it has such a high chance of profit or not.

For example, you can develop a trading strategy with a 60% chance of winning and a risk/reward ratio of 1 to 2.

In this case, of the 10 trades you place, you would close an average of 6 with a profit of €20 and 4 with a loss of €10.

In this situation you would close these 10 trades on average with a profit of €160-€40 = €80

But to achieve this, it is important that you have the right mindset. Because with the wrong attitude, you will lose in the long run.

The Gamblers Mentality

With the gambler mentality, we mean that one has the attitude to enter the market without any tactical plan or a clear strategy.

Placing trades is then mainly done on the basis of feeling and one hopes for luck.

If you ask me, this is the most unwise choice you can make, and if you want to trade this way, you better bet your money in the casino, then you might have a nice evening!

The Traders Mentality

The mentality that is wise to adopt is called the “Traders Mentality”. By this, we mean the attitude that one adopts when acting on the basis of a well thought-out and tested trading strategy.

Here one does not hope for luck, but plays on probability calculation and the highest probability of winning. Discipline and keeping your emotions under control are also important factors.

How to Avoid Gambling on the Financial Markets?

So when you start gambling on the financial markets, you are doomed to fail. But how do you prevent this?

Develop Your Trading Strategy

First of all, it is important to have a clear trading strategy before you get started. Without a strategy, you are nowhere and you can never act consistently.

A trading strategy, simply put, is just a plan that states when to get in a trade and when to get out of a trade. The more specific this strategy, the better you can execute it.

Controlling Your Emotions

The second thing that is important to avoid gambling is to control your emotions.

What you often see with traders is that when they start trading with real money, they are overwhelmed with emotions. This often leads them to make wrong decisions. For example, they often close trades too early or too late, and they take unnecessary risks.

Understand the Trading Dynamics

A third way to avoid gambling while trading is to understand the dynamics of trading.

In the financial markets, traders can make profits only when they outsmart the masses. One's gain is the other's loss. To win, you must do what it takes to win.