Understanding Gambling and Trading

Many people believe that financial trading is just another form of gambling, and specifically passive gambling where the player has no control over the odds whatsoever. Nothing could be further from the truth however, since even classic gambling is not straightforward itself. All gambling games are based on principles of probability and house advantage, but not all games of luck offer equal chance of winning. Gambling is inherently associated with conflicts of interests between the house and the clients.

Even Classic Gambling Offers Diverse Odds

Some people believe that trading is hopeless because the odds are against the trader, this is not necessarily so. Opportunity and risk naturally co-exist. Beyond that, even classic gambling games (which are zero sum games), can in some cases be beaten through sophisticated analysis and meticulous methodology. So similar concepts are applied to financial trading by serious traders and investors determined to win. Even though gambling and trading are significantly different, the concept of odds and probability analysis applies to both of them. Many techniques can be developed that can change the odds for the better.

Zero Sum Game?

Casino games of luck do operate on the zero-sum principle, since they are closed systems. This doesn’t apply to the financial markets as these are decentralized, and all brokers more or less operate as open systems. The main difference between gambling and trading in this case is that gambling is all about zero sum games, but trading is not. In fact trading has to do with the open financial market which allows traders to open and close orders which are not even processed on a one-to-one basis between different traders. An excellent example of this is the modern handling of stock option trades when a trader sells an option, most outdated text books teach that this puts the option seller to unlimited risk obligation… But that’s not true, the brokers actually allow these sellers to buy back their theoretically ‘unlimited loss obligation’ at any time through the open market. This is achieved through sophisticated pricing and equivalent transactions. So the trader doesn’t even have to wait for a single option buyer to take the other side of the trade, since it’s not an one-to-one thing, he can close the trade at any time, and the trade is actually absorbed by 1000s of traders on the other side. The financial markets are much more open and sophisticated than any casino, and can afford to offer winners big profits.