Day trading is often compared to gambling, especially by traders who have tried their hand at day trading and failed. Successful traders are seen as having “lucked out” while traders who lost money are seen as having been “unlucky.”
While there are some aspects of day trading that are similar to gambling, the comparison is far from fair. In this guide, we’ll take a closer look at what day trading and gambling have in common and how they’re distinct.
Is Day Trading Gambling?
Is day trading gambling? The short answer is, it can be – but how similar day trading and gambling are is ultimately up to traders themselves.
The most successful day traders are those who approach trading with a methodical strategy that gives them an edge. For these traders, the practice of trading is very different from casino-style gambling. Other traders treat day trading like a game of chance. These are often the traders who end up losing money.
How Day Trading is Similar to Gambling
Before we dive into the ways in which day trading and gambling are distinct from one another, it’s worth looking at how they’re similar.
First, day trading and gambling can attract similar types of people. Often, these are people who want to get rich quick without putting in a lot of work. Day trading and gambling also tend to attract thrill-seekers who enjoy the rush of putting money on the line.
Second, day trading can be the same as gambling in some cases. If you trade without any strategy, a trade is no better than a coin toss. As far as you know, a stock has a 50/50 chance of going up or down and you’re just as likely to lose money as you are to make money.
How Day Trading is Different from Gambling
For most successful traders, day trading looks nothing like gambling.
Understanding What Gambling Is
To differentiate day trading and gambling, it’s important to understand exactly what gambling is. Gambling involves fixed odds that don’t offer a potential for an edge. The odds in a coin toss, for example, are always 50/50 and cannot be changed. In most casino games, the odds are less than 50/50 so that the house always wins in the long run.
Crucially, gambling is not defined by the presence of risk or the probability of success. Everything from driving to purchases involves risk, but that doesn’t make them gambles. At the same time, day trading isn’t gambling just because the likelihood of succeeding is low. Most businesses fail, but opening a business isn’t a game of chance. Many worthwhile pursuits have low odds of success and aren’t considered gambles.
Day Traders Can Control Their Odds
One of the key aspects of day trading that differentiates it from gambling is that traders have control over their odds. That is, the odds in trading are not fixed as they are in gambling.
That’s because traders get to choose what setups they want to trade. Some setups have higher probabilities of success than others. For example, you may backtest one strategy and find that it’s resulted in profits 70% of the time, whereas another strategy resulted in losses 70% of the time. Traders look at technical indicators, chart patterns, and catalysts like breaking news to help identify high-probability setups.
Nothing is guaranteed in trading, and any single trade may result in a loss even if the probability of the setup is high. However, favorable odds compound over time. Say you use a strategy that has a 70% chance of profit. That means that for every trade based on that strategy, you’re more likely to turn a profit than a loss. All things being equal, you’d expect to eventually come out ahead even if 30% of your trades along the way are losses.
Day Traders Can Control Their Risk
The other important difference between day trading and gambling is that day traders can control their risk with every trade. They can use stop losses and profit targets to define how much they’re willing to lose and how much a successful trade will return in profit.
Instead of risking $1 to make $1, traders can focus on trades with risk/reward ratios better than 1. For example, a trader might risk $1 on a trade that stands to return $3 in profit – a risk/reward ratio of 3. Traders are fully in control of choose the minimum risk/reward ratio they’re willing to trade.
This is especially powerful when traders combine risk management with the ability to control their odds. Returning to the example above, traders could risk $1 on a trade that has a 70% chance of returning $3 and a 30% chance of losing $1. Based on the odds and outcomes, that trade would be expected to yield a positive return in the long run. It also easily beats the expected return of any casino game.
There are No Career Roulette Players
The differences between day trading and gambling are reflected by a simple fact: there are no career roulette players, but there are many thousands of career day traders. Day trading is methodical and can be profitable over the long run if done right. Gambling doesn’t offer a way to improve the odds or mitigate risk, so it’s always a losing prospect in the long run.
How to Avoid Gambling When You Trade
There are five key things to keep in mind to avoid gambling when day trading:
1. Do Your Research
Successful day traders have a strong understanding of the core tenets of trading and how to analyze odds and risk. Build a strong educational foundation and seek to learn from profitable traders before diving into trading.
You can learn a lot for free online. You can also check out premium courses from reputable trading services like Investors Underground.
2. Have a Game Plan
Always trade with a strategy – and stick to it. It’s easy to allow emotions or fear of missing out to creep into your trading, but doing so is a sure way to end up trading setups with low probability or low risk/reward ratios. Know what you’re trading and why you’re trading it.
3. Identify High-probability Setups
High-probability trade setups give you the best chance of turning a profit. While it’s often impossible to know the exact odds of any setup, you can use technical analysis to identify promising setups and backtesting to estimate how likely a specific strategy is to succeed.
4. Manage Your Risk
Look for trades with high risk/reward ratios. Ideally, day traders should seek risk/reward ratios of 3 or higher. When a trade doesn’t go the way you hoped, stick to your stop losses rather than letting emotion take over.
5. Continuously Optimize
Finding success as a day trader is hard work and you need to continuously optimize and improve your trading strategy. When you’re losing money, focus on ways to improve your odds and minimize your losses. When you’re making money, look for ways to maintain your edge and be ready for changing market conditions.
Conclusion: Is Day Trading Gambling?
Day trading is often compared to gambling, and they can be similar if traders aren’t careful. However, unlike gamblers, day traders have the ability to control their own odds and manage their own risk. This gives traders an edge that they can use to make money from the market consistently.