1. What Is The Difference Between Gambling And Trading
2. Is Trading Options Gambling
3. Is Stock Trading Gambling

20:45 How is gambling at gin different than other forms about gambling? 25:04 BlackjackApprenticeship.com - a card counting community and trading site. He doesn’t get the opportunity to define gambling. Gambling is defined differently than investing. Whether you want to call an investment high risk and you want to say that risk. You know, I don’t like putting money into gold. I think it’s a bad place to put money, but I don’t call it gambling.

Thanks to the r/wallstreetbets subreddit, we have all heard of infamous tales where retail traders have profited millions of dollars. Accompanying this is often a cult-like worship by individuals who wish to do the same, and are desperate in finding the secret to such success.

Greed afterall, is human nature.

When it comes to games of pure chance such as the roulette, we are quick to label it as gambling. For games of chance like poker where you possess some level of control, conventional wisdom tells us that it is a game of skill. Because there are elements of decision making and skill associated with trading, it is often not viewed as gambling.

But what actually is gambling? Gambling cannot simply be any games involving uncertainty, otherwise casinos would be out of business. Additionally just because a game involves skill, it doesn’t mean that it is not gambling, otherwise Lehman Brothers would never have collapsed.

Gambling occurs when you have a poor understanding of risk, resulting in either (1) negative expected value bets, or (2) poor bet sizing that leads to ruin.

Negative Expected Value Bets

All bets have the potential to make or lose you money when standalone. The expected value of your bets, is how much you make on average as the cumulation of all of your bets. Thus it follows, a negative EV bet is one where you will on average lose money - like the roulette table.

To help reinforce your intuition, let us imagine a game involving coin flipping. You will win $2 if the coin flips heads, or lose $1 if the coin flips tails. Do you take this bet?

It is pretty obvious that this is a good deal for you. This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1, 50% * (+2) + 50% * (-1) = +$0.50. Try to do the same thing yourself with roulette table odds.

A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average.

It should be noted that you can still make money in the short run due to volatility, so the unintuitive optimal strategy for a night out at Vegas is to bet all your money in one go. If you win, cash out and walk; if you lose, go home - either way, it makes for an extremely short night.

What Is The Difference Between Gambling And Trading

Poor Bet Sizing

Bet sizing is simply how large your bets are - do you throw $100 or $100k at a particular stock? However, it is often more useful to think of bet sizing in terms of percentages, as opposed to numeric figures. In summary the larger the expected return, the larger your bet size.

The concept of bet sizing can be modelled mathematically through Kelly Criterion. It is worth pointing out that it is extremely common for poker players or hedge funds to run Kelly Criterion suboptimally, by betting less. This dramatically reduces the risk of ruin, and adds a margin of safety to often nebulous assumptions.

So why is bet sizing important? This is an often overlooked concept, but it is extremely important to prevent ruin (or losing all your money).

To reinforce your intuition, we will once again return to the coin flip game. Suppose you are in a situation where you win $200 for heads, but lose $100 for tails. But, you only have $100 - do you take this bet?

While this is a positive EV bet, remember that you are only making money on average in the long run. This does not safeguard you against the short term, where you can be making or losing money. Had you taken the bet and the coin landed tails, you would have lost all your money. This means that you are barred from participating in further potentially profitable bets.

Translating this to investing, if you over-leverage yourself, not only might you lose all your money, but you might miss out on partaking in potentially profitable situations.

Summary

A 101 on not gambling:

1. Don’t make negative expected value bets - you are guaranteed to lose all your money in the long run.

2. Scale your bets according to confidence in order to prevent ruin. Overextending yourself can make good bets go bad.

In my past life, I was a derivatives trader on Wall Street. My goal is to share everything I learnt about investing and decision making on Wall Street.

Follow me on Twitter or subscribe to the newsletter to not miss out!

This article is originally published on my personal website christopherjgan.com

Reluctantly, I will admit to having played blackjack professionally in my youth. This means that I played tens of thousands of hands against real dealers in real casinos using real money.

Unlike the stock market, blackjack is a completely closed system, which has a very large number of, but not infinite, possible outcomes (about 4.1 billion, if memory serves).

The mathematics of blackjack are extremely well understood and there have been a number of very good books written describing various systems which have been both empirically, as well as mathematically proven to provide an overall edge over the house of between .5% and 1.5%.

There is a 'basic strategy' to blackjack that has been worked out by players and mathematicians for some time now. It varies to a small degree depending on what house rules you're playing under, such as if you can double down on 18, 17, what you can split on, etc. Mastering that strategy, and learning to count cards, and playing in a shoe with fewer than 3 decks, and where they don't shuffle halfway through, you can tilt the odds in your favor.

In order to beat the house, you must play like a machine. You cannot make mistakes and there is no 'trading' involved. You simply keep track of the number of tens/aces vs. the number of non tens/aces and the more tens/aces that are in the deck as compared to the number that would ordinarily be present in a standard deck, increases your edge against the house, and visa versa.

When the count is 'high', you bet more, when it is 'low' you bet less. Over time, as long as you don't make many mistakes in counting, you will win -- the outcome is completely predicable in advance and it is inevitable.

However, get tired, make a simple mistake or three, easy to do, and you wipe out hour's worth of work. You rarely see a casino offer the game anymore under like 4-6 decks in the shoe, and they typically reshuffle it when they're only 2/3 of the way through, which really sucks butt. A couple casinos, that I've seen in Vegas anyway, have tables with only one deck in the shoe (it's really a 'door crasher' special, they want you to move to higher limit tables), but the limits are sharply reduced, and as soon as they figure you for a player, you're out.

The difficulty is that casino security will watch you play, and if you are winning, by placing higher and lower bets depending upon deck composition, you will be annoyed, harassed and eventually barred from playing.

Years ago, it was relatively easy to get a reasonable game. Today, it is possible, however, much more difficult. The casinos have dumbed down most customers and made the rules much less favorable. In the few places where the odds are still favorable, the casino watches for counters very carefully, making counting for any serious money even more difficult.

The only things in my opinion that are similar between trading and blackjack are:

1. money management.
2. very large standard deviation and variance from expected value (i.e., mean average return), and.
3. the house wants you to lose.

I've played blackjack for over 10 years. In fact, I worked out one of my favorite 'negative expectancy' money management schemes playing it, which is a variation of the old '31' method, which is of course a variation of the 'mother of them all', the Martingale. I hope to successfully tweak the method to suit my trading in a positive expectancy environment--I can see it reducing my risk exposure a great deal, albeit at the cost of some growth rate.

There is no way to intimidate the house in blackjack, and no way to influence the cards by playing style. All of the working systems are based on absolutely mechanical play depending upon the cards in view and the composition of the deck, at any given instant. For every circumstance in blackjack, there is but one correct play, depending upon the count.

This is not the same as trading, although it may seem like it.

In summary, if you think that you can somehow 'trade' with the house in blackjack and win, you will get slaughtered. And, if you doubt this theory, then I will be happy to bet you $100,000.00 that I can methodically play system blackjack against you, under controlled conditions, starting with the same bankroll, and at the end of 100,000 hands, I will have more money than you will.

Is Trading Options Gambling

There are two games you can win at..... Card counting and poker. Well that is mathematically speaking though because you are playing games that are almost 50/50 so really anything can happen in the short term. Good luck!

Is Stock Trading Gambling

The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.