Trading vs. Gambling: Active Participation and Risk Management

By | June 1, 2024 3:50 pm

Some people believe trading is like gambling. It’s not. In a gambling game, you have to participate to lose and do absolutely nothing to stop losing. If, after one bet, you don’t put another bet on the table, you will not lose. There is also no way you’ll win. But, at that point (if you don’t place another bet), there will be no risk.

Differences in Risk and Participation

In trading, it’s very different. You must participate to get in a trade, and you must participate (in other words, do something) to cut your losses. If you do nothing, the possibility exists that your entire account can be wiped out. And even that won’t stop your losses if you still do nothing. (Although, at that point, your broker will most likely participate for you by getting you out of the market.)

In gambling, you know exactly what your risk is and the game always ends before the next one starts. But in trading, you don’t know beforehand exactly what your risk is. (You may have an idea, but even with stop orders there is always the possibility of slippage.) But the real big difference between gambling and trading is the event never ends as the market keeps moving.

Active Participation in Trading

A good example of an active winner and loser might be a person playing blackjack at a casino. You must make a conscious choice to play and risk your money. And when the game is over, the rules force you to be an active loser. If you want to play and risk your money again, you must place another bet. Without another bet, you can’t be a loser again. You must actively participate to lose and do nothing to stop losing, the exact opposite of trading.

This is why (in trading) being an active winner and an active loser is so important. But because the event never ends, it’s easy not to be an active winner and loser. There is always the possibility (no matter how slim) of the market coming back in any trade you’re in. You don’t need to actively participate to get back your losses; you could simply stay with the trade and let the market come all the way and give you back your losses.

Because of this reality, there’s always a constant temptation not to cut your losses. Cutting losses for many traders is painful. So many choose to avoid the pain and not be an active loser. They simply think they are in a winning trade that has yet to show profit. Or we will look at only the evidence that says our position is right and ignore the rest of the evidence against that notion. These are obviously traits of someone who is not an active winner and loser.

Actively Managing Trades

Someone once told me, “To make money trading, you can’t sit on your hands!” Basically, what that means is you need to do things like getting yourself in and out of winning and losing trades to be successful. In other words, the way to make money trading is not only to act in your best interest, but to actually act and do things to help your trading. That means when a trade is going against you, you really can’t sit on your hands and do nothing. You must cut your losses instead of hoping the market will come back.

And when a trade is going your way, you must act in your own best interest by being an active winner. Trail your stops to lock in profits, cover your position when it reaches your target instead of looking for a home run, etc. This is what being an active winner and loser is all about. Don’t sit on your hands.

Leave a Reply