FAQ Is Trading the Same as Gambling?

[jacknapier]

Some would disagree with that.

Peter

I would argue that they are gamblers. I know that there is a certain amount of corruption, but you are supposed to be buying a piece of a corporation, which is a physical thing. I think it's more akin to trading on ebay, than going to Las Vegas. It's just that some people do not know how to value stocks or items on ebay. (Remember that grilled cheese sandwich that had the Virgin Marys' face that sold for $30k?) People lose thousands of dollars a year buying crap they never use or need on ebay. On the other hand, people make thousands of dollars a year selling stuff on ebay. People even lose money selling, because they bought the items new at a much higher price.

Now, of course, with trading on ebay, the playing field is much more fair or even than it is in the stock trading "universe" and that's why it's so much easier to lose money trading stocks.

I know it's not a perfect analogy, but am I way off base in my thinking?

 

[Aesop20]

It's just that some people do not know how to value stocks or items on ebay. (Remember that grilled cheese sandwich that had the Virgin Marys' face that sold for $30k?)

I think in the case of that Ebay item... they probably didn't pay.. and if they did, they probably were aware of how ludicrous it was to spend that much... but they're clearly blinded by other factors..

I've had this debate with people before, and I still cannot decide 100% on either way, the only thing that strikes me as really different, at least between forex trading and gambling, is that with FX you can do all your research and gain knowledge and perfect strategies (like professional gamblers do) BUT, when you put a trade in, you can get out when you want, and you can adjust your SL to ensure that you lose less, or BE even if the trade goes the wrong way for you... you don't get that luxury in sports gambling.

 

[NVP]

I think in the case of that Ebay item... they probably didn't pay.. and if they did, they probably were aware of how ludicrous it was to spend that much... but they're clearly blinded by other factors..

I've had this debate with people before, and I still cannot decide 100% on either way, the only thing that strikes me as really different, at least between forex trading and gambling, is that with FX you can do all your research and gain knowledge and perfect strategies (like professional gamblers do) BUT, when you put a trade in, you can get out when you want, and you can adjust your SL to ensure that you lose less, or BE even if the trade goes the wrong way for you... you don't get that luxury in sports gambling.

theres plenty modern sports Gamblers can do to allieviate risk......its much better than years gone by

N

 

[Aesop20]

theres plenty modern sports Gamblers can do to allieviate risk......its much better than years gone by

I think that's true definitely, that's why i think the distinction between them has become harder, I do think it'll depend on what sport you're betting on too.. but it kind of is just a different beast... When you're betting on a sport you're betting on a group of 11-15 players, or an animal running, or maybe a single person.. Compared to FX where you're placing trades based on the direction you think the market will go.. which is financial and all to do with loads of different factors that are completely different to the factors involved in sports betting, it's a different type of risk involved i think..

 

[datav]

Trading is the same as gambling with an edge. Do you define the owner of a casino as a gambler, or a bookie at a race track? Usually these people are defined as businesses. A trader needs to trade as a business.

 

[Lee Shepherd]

Unless you are spreadbetting then you are gambling. If you wish to call yourself a trader then fine but please be aware you could face a tax bill. For me.....I'm simply a lucky gambler. Thats all.

 

[qwertyuiop1]

Unless of course you are spreadbetting then it is simply gambling. If you change this for oneself then you pay tax on your earnings.

Nionsense - why in your book is trading using a spreadbetting platform considered gam bling and using other platforms not?

 

[the hare]

Nionsense - why in your book is trading using a spreadbetting platform considered gam bling and using other platforms not?

Because its a legal definition. If I make a profit "gambling" on a spread betting platform, its currently considered to be gambling, and not subject to income tax. If the authorities are happy to describe the activity as gambling, then you really don't want to be arguing otherwise. You want to be insisting that its "gambling"

If I make a profit by "trading" on a broker platform, the inland revenue will be wanting their cut.

The same activity is considered to be 2 completely different things from a taxation perspective, and therefore if you are placing trades via a spread betting company, you really should be accepting that you are gambling. I think the clue is in the name, spread BETTING. I assume they also come under the same regulatory bodies responsible for the regulation of bookmakers (I don't know, I don't spread bet )

It's all gambling anyway, I don't see the distinction.

 

[qwertyuiop1]

Because its a legal definition. If I make a profit "gambling" on a spread betting platform, its currently considered to be gambling, and not subject to income tax. If the authorities are happy to describe the activity as gambling, then you really don't want to be arguing otherwise. You want to be insisting that its "gambling"

If I make a profit by "trading" on a broker platform, the inland revenue will be wanting their cut.

The same activity is considered to be 2 completely different things from a taxation perspective, and therefore if you are placing trades via a spread betting company, you really should be accepting that you are gambling. I think the clue is in the name, spread BETTING. I assume they also come under the same regulatory bodies responsible for the regulation of bookmakers (I don't know, I don't spread bet )

It's all gambling anyway, I don't see the distinction.

Spreadbetting can be gambling - as can be trading o0n a broker platyfoirm.

In a nutshell my definition of a gambler is someoen who bets and has a netatiove expectancy over the long run. Your typical guy in the bookies would fit this definition - the bookie homself would not.

Same applies to peopel who trade - any one who trades aimlessly with no strategy will undoubtedly lose their money over teh long run.

A trader with a positive edge system will not - and therefore nota gambler.

As to whetehr they aooly their positive edge startegy via a spreadbetting firm or a broker platform is neither here nor there. It can be done successfully on both -as can gambling be done on both.

Obviously I am happy for tax reasons spreadbetting is technically considered 'gambling' - but your post suggested that if someone trades using a soreadbetting firmn the nthey are more likely to lose than if they trade using a brokers platform.

Perhaps I misunderstood your post though.

 

[the hare]

Obviously I am happy for tax reasons spreadbetting is technically considered 'gambling' - but your post suggested that if someone trades using a soreadbetting firmn the nthey are more likely to lose than if they trade using a brokers platform.

I'm sure many people would argue that's the case. I've traded with a spread betting company and lost money, but that was 10 years ago, and I didn't know my **** from my elbow, and would have lost money wherever I was trading

Im sure that there are people who do trade successfully with spread betting companies.

I know a few people involved in gaming, who lost considerable amounts of money despite their platforms having a positive expectancy for the house, and to that end I personally consider both sides to be gambling ! although I know where you are coming from

I find it helps me to manage the process by thinking of what I do as gambling, I'm sure it helps others to take the opposite view. It's a mental crutch, but useful.

From what I understand, Lee's position on this is that classifying his activities as gambling keeps things simple from a regulatory and taxation perspective. The moment you cross the line and insist you are "trading" life gets a lot more complex and stressful.

 

[Alliance01]

Trading and gambling are different points on a risk spectrum that ranges from crossing the road to playing Russian roulette, and they actually aren't that far apart from one another. All trading (and I mean all) has some degree of uncertainty and so some element of open risk or 'gamble'. There are differences in terms of preparation, risk controls and so on but let's not kid ourselves; no one can 100% know the future outcome of any event whether that is a footie match or a stock. All this guff about 'edge' is self-important code for having thought something through and managing to find a way not to blow yourself up!

 

[normbeef]

Trading and gambling are different points on a risk spectrum that ranges from crossing the road to playing Russian roulette, and they actually aren't that far apart from one another. All trading (and I mean all) has some degree of uncertainty and so some element of open risk or 'gamble'. There are differences in terms of preparation, risk controls and so on but let's not kid ourselves; no one can 100% know the future outcome of any event whether that is a footie match or a stock. All this guff about 'edge' is self-important code for having thought something through and managing to find a way not to blow yourself up!

spot on, like you say the "edge" is just another word for

"preparation" "hard work" "experience"

or "inside information" ;-] nice if you can get it...

 

[Alliance01]

spot on, like you say the "edge" is just another word for

"preparation" "hard work" "experience"

or "inside information" ;-] nice if you can get it...

Yep, and on top of that whilst preparation, hard work and experience are all very useful they are still no guarantee of success (though they do tend to help over the long run) as there is still uncertainty and thats why trading and gambling are variants of the same thing. Black swans. One in a million events. Sendings off. Corruption/match fixing/insider dealing. The best thing anyone can do is devise an approach and discipline that stops them blowing themselves up. Wins look after themselves, it's the losses that will kill you. That's the primary thing that separates a trade from a gamble; controlled risk. Boring but true.

 

[normbeef]

Yep, and on top of that whilst preparation, hard work and experience are all very useful they are still no guarantee of success (though they do tend to help over the long run) as there is still uncertainty and thats why trading and gambling are variants of the same thing. Black swans. One in a million events. Sendings off. Corruption/match fixing/insider dealing. The best thing anyone can do is devise an approach and discipline that stops them blowing themselves up. Wins look after themselves, it's the losses that will kill you. That's the primary thing that separates a trade from a gamble; controlled risk. Boring but true.

yeah controlled risk, but with any trade unlike a gamble you dont know the multiples before you put your money on the table. i.e. I might make 10 times my bet if the market goes my way by a lot, but in gambling I would need odds of exactly 10-1 for this to happen. Given that I would need to bet on Man Utd losing at old trafford to Accrington Stanley (unlikely).. also there is no control of downside.. I lose all my money on a gamble where I might decide in the trade to pull the stop trigger early..

its a technical question really... gambling is different to trading because of the way the gambling industry is structured. (i.e. gaming rules / odds)

In a way gambling is easier than trading because past performance is generally a good indication of future performance in variable sports or games. i.e. the bookies set the odds out for you.. there are wierd results, but generally the same teams / horses tend to win over the longer run and they are priced accordingly.

Casino gambling / fixed odds games are for mugs.. the house always wins...

 

[Alliance01]

yeah controlled risk, but with any trade unlike a gamble you dont know the multiples before you put your money on the table. i.e. I might make 10 times my bet if the market goes my way by a lot, but in gambling I would need odds of exactly 10-1 for this to happen. Given that I would need to bet on Man Utd losing at old trafford to Accrington Stanley (unlikely).. also there is no control of downside.. I lose all my money on a gamble where I might decide in the trade to pull the stop trigger early..

its a technical question really... gambling is different to trading because of the way the gambling industry is structured. (i.e. gaming rules / odds)

In a way gambling is easier than trading because past performance is generally a good indication of future performance in variable sports or games. i.e. the bookies set the odds out for you.. there are weird results, but generally the same teams / horses tend to win over the longer run and they are priced accordingly.

Casino gambling / fixed odds games are for mugs.. the house always wins...

Hmmm. I agree with parts of this but not all. Yes, you know your possible payoff with fixed odds but you can generate something similar in any market using stop losses and limits and the like can't you? You can define your pay off to a pound (though clearly it isn't completely black and white). Plus, if you are trading within sports markets you are not necessarily looking at binary odds, you may be taking value in the movements. One final thing, the notion that fixed odds mean the house always wins is something i genuinely dont understand. It is possible as an individualto win consistently via sensible selection. Yes, on a properly structured book (which is actuality nit as common as you might think) the house should not lose out across all its individual positions but in isolation it can and does lose. There is a bit of snobbery about fixed odds stuff that seems a bit unfair to me but that's just my own view! I'm happy taking money whatever the market structure!

 

[timsk]

As a little side dish to the main course of this discussion, this recent episode of Panorama might be of interest:
Panorama - Gambling Nation
For me, personally (and I fully accept others will take a different view), it all comes down to positive expectancy. In this half hour film, most or all of the bookmakers have a positive expectancy, while their punters don't. For me, the bookies aren't gamblers because they know their business model generates consistent profits in the medium to long term. They may pay out the occasional big sum, or have bad days, e.g. when an outsider wins the Grand National or whatever but, over time, they do pretty well.
Tim.

 

[timsk]

It's an interesting point about positive expectancy.
The Nobel Economic Laureate Daniel Kahneman, did a study involving some of the top Wall St traders. He concluded that they had the same success rate, as a chimpanzee flipping a coin.

Hi mrblonde,
It would be good to know more detail about Kahneman's study. If all traders are no better than chimps - I ought to be just as good as any top prop or IB trader. Equally, retail traders ought to achieve the same percentage success as institutional traders; yet they appear not to. There are lots of anomalies which suggest to me that Kahneman wasn't taking account of some key factor(s). Of course, he may just have picked a duff bunch of traders for his study - e.g. those working at Bear Stearns trading those fancy derivative products (whose name escapes me!) at the time of the U.S. sub-prime mortgage crisis!
Tim.

 

[the hare]

Hi mrblonde,
It would be good to know more detail about Kahneman's study. If all traders are no better than chimps - I ought to be just as good as any top prop or IB trader. Equally, retail traders ought to achieve the same percentage success as institutional traders; yet they appear not to. There are lots of anomalies which suggest to me that Kahneman wasn't taking account of some key factor(s). Of course, he may just have picked a duff bunch of traders for his study - e.g. those working at Bear Stearns trading those fancy derivative products (whose name escapes me!) at the time of the U.S. sub-prime mortgage crisis!
Tim.

Leonard Mlodiniw in his book drunkards walk looked at the long term performance of a bunch of CTAs, and came to the conclusion that they performed worse than chimps. It's not really surprising.

retail traders have massive disadvantages, in comparison to their institutional counterparts, hence their worse performance

 

[timsk]

Leonard Mlodiniw in his book drunkards walk looked at the long term performance of a bunch of CTAs, and came to the conclusion that they performed worse than chimps. It's not really surprising.

retail traders have massive disadvantages, in comparison to their institutional counterparts, hence their worse performance

Hi the hare,
I accept that retail traders have massive disadvantages compared to their institutional counterparts, so I agree with you on that front. However, I'm less convinced by your first para'. CTAs and institutional traders can't really be compared - can they? If, for the purposes of this discussion, you're suggesting there's no difference between them, and that bank traders who earn serious coin are really no better than chimps, then surely the banks' shareholders would demand that the trading floors were replaced with primates? Their annual spend on bananas might soar, but the savings made in staff salaries should just about cover it!

Tim.

 

[Shakone]

Kahnemann is looking at the illusion of validity, but isn't the example of the firm with trading advisers who have ranking correlation 0.01, and therefore is just luck, an example of the illusion of validity itself?

I may have misunderstood the test, but as I see it, the statistical test there tells you pretty much nothing about whether it is a skill or just luck for each individual.