Is Day Trading Gambling?
With the rise of retail trading and investing during the pandemic, you’ve probably seen plenty of articles and WallStreetbet reddit posts, showing some outrageous profits from retail traders, who lost their jobs and decided to put their stimulus cheques in the market
While many find these gains impressive, there are also others who call it gambling. As a profitable day trader who's been in this business for more than 7 years, I’ve been called a gambler by people online and in real life who have never placed a trade, but in all these years of trading, I'm still here.
I do agree, there is a fine line between trading professionally as a business and just blindly gambling your money away.
That's what we’re going to be talking about in this article. What are the key differences between gambling and trading?
Overview
I’m going to explain even more in detail and add in my own personal stories. Let me be the first to admit, when I first started day trading 7 years ago, I was definitely gambling.
I want to share with you the key principles and steps that have enabled me and many other profitable traders I know to eventually make the shift to become consistently profitable over time.
I want to start off saying that… Most traders, myself included, started out treating day trading as gambling. It's almost a rite of passage. When I first started day trading, I wanted to get rich quickly. I thought this was going to be easy money and I could turn $1,000 into a million in 6 months.
Let me tell you, the only thing that happened quickly was my account balance taking the priority express lane down the drain.
Traders Profit Slowly
This is the first key difference between traders and gamblers. While traders focus on making profits slowly and steadily in the next 100 or 1000 trades, gamblers want shortcuts to get there in the next 10 trades.
That's the reason Gamblers look for chat room alerts; they copy other people’s trading streamed online, and look for anything that remotely sounds like a shortcut to profits without the work.
Even if they strike it rich quick, many gamblers tend to lose it or give it right back to the market, because relying on luck and following others is simply not a repeatable strategy. Basically, when this “strategy” makes money, the wins are small, and when it loses, it loses big.
Time Horizons
This is truly a gambler's mindset. It’s very different from a full time trader’s time horizon for profits. As a real professional trader, the time horizon we should aim for is the next one to three years out, rather than trying to make it quick.
Trade Journaling
In addition, real traders focus on journaling their trades, whether it's a loss or a win. They meticulously review their chart execution results and dive into the analytics behind their trades.
There are always lessons to be learned. Traders want to know why they made a profit, so they can keep repeating those habits. They also want to know why they lost, so they can stop paying for someone else’s lamborghini.
Now, the gamblers would say, “ohhhh sure everything is easy in hindsight,” and they’d never look back at their past losses and learn from their mistakes. They would immediately come back again the next day and look for the next 10 easy trades and repeat the same gambling behaviors.
Trading Back Tested Strategies
The second key difference between real traders versus the gamblers, is that traders focus on trading their back tested strategies, while gamblers take random trades or even worse, put their money into random stocks they see people talk about on YouTube, Twitter, TikTok or Reddit.
I think this pretty much sums up most of last year. With the rise of retail investing and subreddits such as WallStreet bets, trading YOLO style became the norm.
All of a sudden, trading like degenerate gamblers became cool. If you follow risk management and stop out of your trades… like a professional trader would do, then you’re laughed upon, and you’re called Paper hands.
That was definitely true the entire year last year when I showed that I closed my trades on GME and AMC for loss or profit. Hey, I'm totally fine paper handing it, as long as I can remain green, profitable and live to trade again and into the future.
In the last few years, it became cool to go all in into one or a few stocks with highly questionable fundamentals and leveraged derivatives like out-of-the-money options calls.
It became cool to risk a lot of money and throw them in whichever tickers are the most popular stocks on Reddit… or oh man… YouTube.
To me, it seems like this is the epitome of gambling. I'm sure some people made it big doing these YOLO trades as they are shared on the Wallstreetbets subreddit, but the majority probably did not.
Let’s keep in mind that GME and AMC and the Wall Street Bets movement was just that–a movement. It was inspiring to watch the masses (the Little Guys and Gals) show the Market Makers and hedge funds that retail can band together and take action.
Diamond Trading
Just understand, though, diamond handing is not trading. While that strategy worked for a short period of time, it is not repeatable day after day or year after year for professional traders.
Especially in the current down-trending environment where stocks are hitting new 52 lows, overnight gap downs, and just selling off due to fear of interest rate hikes, inflation, and war… YOLOing, or diamond handing is simply not going to work.
If you’re a new trader who wants to take this business seriously, remember random trades and random setups from random stocks circulating on social media will lead to random results.
Gamblers trade based on what's being hyped up online and from following others; real traders trade back tested strategies.
It's only by tracking your trades, that you can start seeing whether you are better at going long or short or whether you are better at trading large caps or small caps? What kind of risk-reward do you have in your trading setups? How should they be modified in a market crash or a bearish environment?
These are all the important questions you’d need to find out for yourself from the data in your trading journal.
Control of Emotions
The third key factor that differentiates traders and gamblers is that traders have firm control of their emotions and will know when to call it quits on a red day after a certain loss threshold.
While gamblers, being addicted to the adrenaline and unable to control their greed, fear, and anger, often give in to the rush of the moment and continue on to losing even more.
I definitely remember in my first year of trading every single loss, however big or small, would often pull me back to my keyboards and force me to place another trade immediately after the loss. I just felt this rush and uncontrollable urge to make that money back, to repair not just my account, but let's be real, also my ego. My ego didn’t want to be wrong.
Letting Go of my Ego
Reflecting back on those early years as a new trader, I can definitely say that one of the key factors to helping me transition to become profitable overtime, was letting go of my ego. Basically I had to accept that the market is always right, and yes you and I, the little retail traders could be wrong.
There's a famous saying, “the market can stay irrational longer than you can stay solvent.” That is 120% true in day trading, and yes I did the math right. Not only do you need to be right on the thesis, but you also need to be right on the timing and execution.
Instead of trying to fight the news, fight the market makers, fight the trend as many new traders do, and yes I used to do all of the above. I now just cut the trade according to my predetermined risk area. Just cut it, move on to the next one, and don't baghold.
Don't diamond hand either! You can just make money from trading well and buy your own diamond later.
It’s very important to accept that you may be wrong and that you may lose money in trading. However, what's important is that when you are wrong, you’re wrong small, and when you are right, your green trades are right two to three times greater than the loss.
Letting go of my ego definitely helped with emotional control as well. As day traders, we see the deepest and rawest human emotions in ourselves within a span of a few hours.
Many preach that as traders, you need to eliminate all emotions. However, my personal approach is, rather than trying to suppress the fear, greed, euphoria, and excitement that we all feel as traders, I simply learned to consciously recognize those particular emotions in the moment and have proper steps to face those emotions.
Dealing with Emotions
For example, nowadays when I feel frustrated after getting stopped out two or three times on the same ticker, I simply remove that stock from the screen. When I accidentally executed orders on position sizing, buy or sell, I simply got out of the trade all together.
No longer do I try to revenge trade because of anger, frustration or panic. I simply accept that I’m just wrong on the trade. I do feel frustrated and therefore I should stop. The market will still be here tomorrow.
If you want to maintain discipline and self-control, you have to look inwards and take some responsibility, eliminate your ego and recognize your emotions. Otherwise, you will forever be trading like a gambler.
I think actively following these principles of day trading with a long term horizon, focusing on trading only proper strategies, and controlling emotions and ego properly have really been key in getting me over the hump of my initial year of trading failure as a former gambler.
