Gambling is perhaps more self-contained than trading. That is, gambling is about a single game that is played with a set of rules and uninfluenced by outside events. Trading can be conducted as an exercise that is similarly contained – the technician whose only inputs are price charts and technical indicators – but trading typically includes an awareness of external events taking place in the world around the trader: Economic reports; unexpected international events, natural or human-made; trading activities of far-flung participants and other markets. Most traders, whether fundamentalists (those trading on underlying economic activity) or technicians (the chartists) are aware, and attempt to make use, of information that is somewhat tangential to the specific market where they are active. In this sense, the trader is perhaps a bit more connected to the outside world and the ups and down of the global economy than is the Las Vegas black jack gambler, and this perhaps gives the trader greater gravity relative to the gambler.
Traders may view themselves as more technical, even scientific, than gamblers, relying on intricate formulas and algorithms for success, and so they give their endeavor higher marks than gambling. But this argument probably does not stand against the expert card counter or the gambler claiming a vast knowledge of poker hand probabilities. In a similar vein, many traders will argue that it is their conservative money management that distinguishes their trading from gambling. A trader will never put him/herself in a position where one trade can knock them out—well they shouldn’t but it has happened i.e. London Whale. But then, I have listened to poker players expound on the intricacies of managing their stake against other players and the “blinds” used to enter a hand. As with every endeavor, there will be outstanding practitioners of both trading and gambling who will bring a tremendous amount of expertise to the endeavor.
While both trading and gambling are inherently stochastic, or probabilistic, there may be more techniques that can be brought to bear to beat the odds with trading than gambling; or, more simply put, it’s often thought that chance plays a larger role in gambling than in trading. But is that really the case? What about the mathematician Ed Thorpe’s efforts to completely understand the probabilities of blackjack? Thorpe states that he ran literally trillions of test cases on early IBM computers in the 1950s in order to completely model the game. The mathematicians, physicists and computer scientists on Wall Street developing high-frequency algorithmic trading make a case for a greater intellectual effort currently expended on trading. In the end, it probably again comes down to the individual trader and gambler: There will be gamblers who have invested equally in their success relative to the sophisticated trader.
The difference between trading and gambling may come down to the specific properties, or parameters, of the two. Trading pits individuals against a vast market. Gambling generally pits individuals against other individuals (or the house) and perhaps there is more inherent emotion in gambling as a result, though having traded for a number of years, I honestly can’t imagine there being more emotion to gambling than trading.
But, as before, perhaps the only conclusion we can draw from this is that like most everything else in life, it comes down to the individuals involved. There may be more serious traders than gamblers, and there may be more weekend gamblers than inexperienced traders. There may be more simple game playing in gambling, where one goes for a jackpot with friends at the kitchen table, while trading involves an inherently more serious player who is looking to earn a living. Perhaps this is the only real difference between the two. But it is not obvious to me.
For 20 years Michael Gutmann was a software engineer and manager at Intel Corp. He is an expert at building and analyzing quantitative trading strategies, which he has written about extensively. He recently published the second edition of “The Very Latest E-Mini Trading: Using Market Anticipation to Trade Electronic Futures.” Michael can be reached by e-mail:firstname.lastname@example.org