Here’s why casinos are “guaranteed” to profit:
1) Statistical edge: they only offer games with a positive expectancy (in their own favor). [OK, it’s possible for the punter to count cards in Blackjack, but with the countermeasures casinos take nowadays, it’s extremely difficult to prosper].
2) Turnover: the more transactions per hour, the greater the opportunity for this edge to prevail.
3) Money management: maximum permitted bet size is trivial compared to the casino’s capital reserves.
4) Discipline: all games operate unswervingly to fixed rules.
If I play in a casino, I’m “gambling”. Why? Because I’m playing for only a short period of time, and the casino’s edge is sufficiently small, that I might strike it “lucky” for a while. We’re dealing with probabilities, not certainties, and the lower the number of trials, the more “random” the overall outcome.
So is the casino (who is playing the same game, against me) gambling? If one wants to be pedantic, yes. It’s possible that the casino could lose (for example) a trillion plays in succession, but the probability is almost infinitesimally small.
Even though markets are driven by emotion, and hence probabilities of price movements can’t be predicted with mathematical accuracy, I think the parallels with trading are valid enough. Anybody can get lucky in the short term (read their testimonials on system vendors’ sites! ). But to succeed consistently, year in and year out, one must have the “fantastic four”: edge, turnover, MM and discipline. The greater the edge, the lower the turnover needed for it to prevail, and the less conservative one’s position sizing needs to be. Transaction costs make trading a negative sum game.
Some top traders trade breakouts. As they will acknowledge, not every breakout (entry + exit) leads to a winning trade. Supposing the market conditions (price movement or pattern) that caused a loss was to occur 100 times in succession. At 1% risk per trade, that would effectively wipe out even the best trader (OK, the law of diminishing returns would mean that his/her equity will never reach absolute zero, but you get the idea). In a sense then, the trader is gambling on the fact that those same (or similar) conditions won't “cluster” often enough to cause irretrievable drawdown. Or, put another way, the trader is counting on his/her edge to prevail, and frequently enough to justify the magnitude of his position size.
So what is “gambling”? If you have 10% chance of losing your bankroll in (for example) 100 trials?
1%?
0.01%?
0.000000000000001%?
Therein lies the answer, and I would suggest that, at least to some extent, it is a subjective one.
David
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