Is trading futures (or any other leveraged instrument) the same as gambling?

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Is there truth to the saying that gambling and trading are one and the same? After all, this is something that I hear from many novice investors and traders after they’ve had a losing streak. Is there any truth to this belief? The notion that trading is similar to gambling is the actual acceptance that eventually you will lose. To be specific, there are several unknown variables outside our control with slim odds of us beating them.

We’ve come such a long way: cheap commissions, sophisticated platforms, back-testing capabilities, educators, books, and we still manage to lose. As a brokerage owner, learning to accept this as a rule is a hard reality to digest. I have seen some very successful traders is this industry, but I can’t look at them as a sample because every industry has the “exceptional ones”.
At the end of this article you will realize that trading and gambling do share things in common. BUT, you must realize why.
Recently, I traveled to Las Vegas to a trading seminar. Any chance I can learn something in sin city, why not? After a long seminar and an extensive dinner I went to play black jack. After an hour of playing, the question has dawned on me: are traders and gamblers one and the same?

Here is what I observed: Speculators and gamblers show the same tendencies when it comes to their capital when faced with a combination of rules and randomness. Irrational emotional behavior overtakes the trader/gambler when faced with losses. Risk management (doubling up on the next hand/trade) goes out the window to try and recapture losses. I am specifically referring to Black Jack which combines certain skills of card counting, mathematical odds and randomness.
Here are some of the behavioral tendencies I observed:
You lose on most hands, in other words the percentage of winners is less than 50%. Better odds give you a chance to double up, or let the dealer go bust. But on most hands most players lose. A player starts with the smaller chip amounts, and will lose on most occasions. At some point the player realizes that he has so many small losses, he will need a good hand to bring his capital back to breakeven. So he increase his bets from $5 to $10, $15 and more.

Traders do the same thing, especially day traders. Traders of the Emini SP contract or FX traders, place small stops, and get stopped out again and again thereby taking several small losses. At some point a trader will start increasing to two or three lots in the hopes of recovering from previous losses. Neither the Black Jack player, nor the trader comes out ahead.

There are disciplined players who come to the table, or should I say they understand the odds of the cards better due to experience. They know what to do and what to expect, but rely on the “maybe” factor which is “maybe I can break all the rules and come out a winner”. To get into that state of mind, all you have to do is just lose enough money. This is equivalent to a trader who gets into a position based on a methodology, but refuses to get out because the trade is losing. Now, everything from his/her analysis points to a different direction, but nevertheless he relies on the “maybe factor”.
Gamblers and speculators have a lot in common; they both want to prove that they are risk takers, enjoy bragging after a win, like to win with little effort and always prove they are right. Above all, they love predicting the future based on guts and intuition.

What is the conclusion: You must remove the gambling part from trading!

How?

1) Risk with a predetermined number of lots until you double your capital. For example, If you trade one lot with 5K, then never increase to two until your capital has doubled.
2) Have a reference point. Trade with rules, and have your decision based on something that is highly technical, not your “I think” and “seems like”.
3) Never double down. Never add to losing positions. NEVER. If you read this rule and still did…quit trading now.
4) At times…Walk away. That’s also a trading decision and the hardest decision. The psychology of trading makes it hard to do, but you must. Do so during good times and bad. When it’s good we get just as overwhelmed as losing.

I hope this settles the argument.

Matt