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Gambling VS Trading

  • Post #1
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  • First Post: Jul 9, 2012 7:07pm Jul 9, 2012 7:07pm
I had an interesting conversation with a friend of mine this weekend and thought I would share.

First of all, I have been trading, supporting my family for the past several years. I live comfortably and am happy with my lifestyle. My wife doesn't work and we can do whatever we'd like. My friend who is a long time family friend is a professional craps player and former IBM engineer. He has played craps professionally for over 20 years.

While I was at my dad's this weekend he stopped by and during our conversation he commented how he would never risk his money like I did. This came as a surprise to me knowing what he does for a living.

To keep it short, he basically compared trading as a less than 50/50 proposition and his style of playing craps as a 79/21 proposition.

I know nothing about craps but it did get my thoughts going. In trading, experience is a factor that while you cannot quantify it, certainly does improve your odds better than 50/50.

I've love to hear your thoughts. All I could say to him was that I'm happy with where I'm at but I would have loved to come back with some better reasoning.

Since I know there are smarter people in here than I, I look forward to your thoughts.
  • Post #2
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  • Edited at 9:56pm Jul 9, 2012 9:23pm | Edited at 9:56pm
trading currency is not even close to being a 50/50 type of situation.

when i trade currency, when i open a trade, this is similar to walking thru a door that leads into the bank, and as soon as i get in the door the bank slaps me up side my head...

i walked thru the door with a single dollar in my hand...

and the first thing that nice banker does is that he take a few pennies from me...

the first slap is called the spread that we pay to enter a trade.

that spread comes right off of the top...

like, bam, give it to me, says the nice banker man.

slap! slap!

ok, fine, my dollar is now worth 97 cents, for example...

i dont stand much of a chance to win..

50/50 doesnt even apply to this type of a game...

and then every day that i am in the trade, the banker slaps me again...

every day, he charges me some kind of rollover or interest fee...

slap!!

sometime, but not often, i will get to slap him every day with a positive interest trade...

not in most cases... in most cases, he gets paid daily...

so, my dollar that i walked into the bank with is dwindling...

drip, drip, drip, goes my dollar, a few pennies at a time, into mr bankers pockets...

and i gotta come out of this situation with more than a dollar in my hands?

the odds of my actually walking out of the bank with more than my original dollar are not very much in my favor.

the bank ALWAYS HAS THE ADVANTAGE.

what are you thinking, do you think that they designed this retail currency trading system to allow little old you, joe lunchbox, to steal money from the banks? you are too funny. this system of currency trading was designed from the ground up in order that the banks can quite quietly steal every penny that you deposit into your account. this is sortof why it is said many times that 95% of traders lose. but that aint the whole story... ALMOST ALL TRADERS LOSE. if you dont believe me, just ask around..

happy trading,

zero/.

http://smoknfx.com

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http://smoknfx.com/av.bank.php
Quoting smoknfx
trading currency is not even close to being a 50/50 type of situation.

when i trade currency, when i open a trade, this is similar to walking thru a door that leads into the bank, and as soon as i get in the door the bank slaps me up side my head...

i walked thru the door with a single dollar in my hand...

and the first thing that nice banker does is that he take a few pennies from me...

the first slap is called the spread that we pay to enter a trade.

that spread comes right off of the top...

like, bam, give it to me, says...

A CEO on another forum stated it is just under 80% that lose.
Quoting smoknfx
what are you thinking, do you think that they designed this retail currency trading system to allow little old you, joe lunchbox, to steal money from the banks? you are too funny. this system of currency trading was designed from the ground up in order that the banks can quite quietly steal every penny that you deposit into your account. this is sortof why it is said many times that 95% of traders lose. but that aint the whole story... ALMOST ALL TRADERS LOSE. if you dont believe me, just ask around..
Relax Kimosabe! Keep at it and maybe some day you'll be successful.
trading as well as gambling (professional gambling) is the exact same thing. You place a bet on a future event that has a certain probability of occuring. Easy.

that's why i think that a professional gambler can easily become a professional trader and vice-versa
Twitter: @forexpokerpro
Trading can be like gambling, or it can be like a business. Of course GAMBLING can be like gambling, or it can be like a business.

Sound confusing? Let's break it down.

Someone who plays craps is gambling. He is involved in a game that is rigged to not give him an advantage. Craps and poker are tricky in that you can develop systems which take advantage of probabilities...but these systems do not give you the possibility of having a true "edge" when all factors are concerned.

But wait....what about the casino? They're involved in this activity too. Are they gambling? Of course not. They're running a business. The casino has an edge over the players and so they always win over the long run. Really, the only way a casino can fail is if people don't like coming there but instead go to a different casino. They're really no different than a restaurant in this regard. If someone doesn't like your eatery (doesn't matter if it's because of the food, the atmosphere, the friendliness of the staff, cleanliness of the building, etc) and goes somewhere else, your diner goes out of business. If people leave the casino for another casino....they go out of business. Other than that, they win big over the course of a year - even if they take a hit of a few million from some lucky "high roller" every now and then.

So the casino is involved in the activity that is known as "gambling" but their involvement has to be classified as a business, because they're really not risking anything when all is said and done.

I'll write more in a bit about how trading FX can be either like gambling from a player's perspective (true gambling) or gambling from the casino's perspective (business).
Alright...so now that we have a framework for the discussion...let's get down to business.

The factor that makes the difference in whether or not you are approaching FX trading as gambling or as a business is whether or not you have an "edge".

In the case of the casino, they automatically have the edge because they make the rules of the game and it's structured so that they have the edge. Forex trading is different in that there are no defined rules (other than don't get a margin call) so everyone can approach the activity their own way. Now here's the big take-home truth....

You Can Make Your Own Edge!


Let that sink in. The only reason that a casino is really a "business" and not a true "gambler" is because it found an edge which it employs continually to it's advantage. Once the edge is found, the only question is how many transactions you can participate in, and how quickly you can do them over the course of a day, month, or year.

If YOU have an edge, the concept becomes the same. How many transactions over the day, month, year? You're "playing the game" of Forex the same way that a casino plays the game of craps, roulette, slot machines...or whatever. At the end of the day, they risk nothing because they have the edge.

If YOU have the edge...at the end of the day, you risk nothing more than a casino does.



Now here is where it gets good. Every trader has a trump card in their back pocket which instantly gives them an edge. I'll talk about that next.
The Trump Card which all Forex traders have (but few take advantage of) is trading based on a 1:2 Risk/Reward ratio.

You can learn why proper application of risk/reward is pretty much equivalent to the holy grail by reading this article.

You can see the power of this in effect by checking out experiments where people trade using pure chance (entering in a random direction determined by the flip of a coin) by reading this article.

[Disclaimer: I've not bought this guy's course and I don't intend to because he is a hardliner for trading higher timeframes like the daily charts. That doesn't make sense to me. Imagine a casino (business) which only entered into a transaction with a player on a Monday and didn't wrap it up until 10 days later? Not enough transactions to make the business as a whole make sense. I do feel that he locked onto the most important principle in trading though.)

Now, the reason that I say that the 2:1 ratio is the Trump Card, and not the 3:1 ratio, is that based on what I've seen in the charts, the 2:1 ratio comes up all the time. There are setups all over the place where you can earn 2x what you risk. Doesn't really matter the system. You can find price moving in your direction 2x constantly.

Next we'll talk abut the Achilles Heel of Risk/Reward.
The Achilles Heel of the Risk/Reward setup is the 3:1 ratio.

The fact of the matter is that people look at past charts and see price hitting 3:1 plenty of times. When they subsequently enter a trade and the price hits 2:1 in their favor, they then question whether they should exit or not.

Unfortunately, the price will very often not reach the 3:1 ratio and by the time they pull out, their finalized price is less than 2:1.

Seeking 3:1 Rewards Will Not Bring More Profits than Finding Multiple 2:1 Setups.

So there you have it. The recipe for creating your own "edge" in trading and transforming your experience from gambling to business. Here's the steps:

1) Find a System That Will Win 40-50% of the time in any given month on as low a timeframe as you can realistically trade. Remeber, the lower the timeframe, the more often the setups come up. That's why casinos favor slot machines. Banks of slot machines crank through thousands of transactions per hour. No real risk to the casino...it's all business to them. Might want to steer clear of the M1 charts though because the spread might chew you up.

2) Make Sure the System is Based on a 1:2 Risk/Reward Ratio - if the system doesn't work based on this, throw it out and find something else.

3) Don't Go For 1:3 - this will only hurt you in the long run. If a move looks strong, enter at 1:2, wait for the candle to close, and then if it looks like it has more gas left in the tank, enter again and target 2:1 all over again.

4) Proper Money Management - this is a separate topic all together and I"m not going to post another series of info on it here. Bottom line is that a bad money management plan can erase the edge you get from the Risk/Reward ratio. You should read this article to get the myths of money management cleared out of your head. I like the money management program outlined right here on Forex Factory on the first post of the Symphony System. If you want to cut your risk-per-trade down, just cut the ratios posted there in half. You'll grow your account a lot more slowly, but some people need to "know" they are taking on less risk than others. Each to his own.
In trading you can still make money even if your system losses 60% of the time and sometimes more.

Money MGMT is the name of the game control your risk and position size then the odds can be more in your favor. Think like the casino does they are not gambling they know they have an edge statistically so can we by using proper risk to reward scenarios.
Yes, Gambling is a little similar to trading but that starts and stops with the risk factor. And as for traders making little or no money, come on - if that was the case, none of us would even be on this forum or would spend time replying to this thread..smh
Quoting Yogi3o3
To keep it short, he basically compared trading as a less than 50/50 proposition and his style of playing craps as a 79/21 proposition.
I don't understand craps either. But I assume he's winning money by betting against the other players, because casinos don't offer games that will cause them long term loss.

If I could find a game that offered me 79/21 odds in my favor, it would make trading a complete waste of time.

From a mathematical standpoint, trading is arguably more of a gamble than casino games, because the odds can't be precisely calculated.
Quoting hanover
I don't understand craps either. But I assume he's winning money by betting against the other players, because casinos don't offer games that will cause them long term loss.

If I could find a game that offered me 79/21 odds in my favor, it would make trading a complete waste of time.

From a mathematical standpoint, trading is arguably more of a gamble than casino games, because the odds can't be precisely calculated.
That's true, we cannot calculate the odds involved in Trading..though wish we could and that would make all the diff..
Quoting Yogi3o3
My friend who is a long time family friend is a professional craps player and former IBM engineer. He has played craps professionally for over 20 years.
Would you please explain us what is a "professional" craps player? I'm asking you this because I'm very familiar with gamblers and casinos, and these people who call themselves "professional [insert name of casino game here] players" are usually just plain idiots. I'm not insulting you or your friend, I'm just saying that casino gamblers and so called "professional players" are not the guys I go looking for when I need some advice on mathematics, trading or anything related with finances.
I used to work at the GM Tech Center in Warren, MI doing CAD work on the midnight shift back in 1999. There was a guy there who literally would leave the place a 3:30 and go over to Casino Windsor (not called Caesar's) to play craps for about 8 hours. He considered it a second job that was building him a nest egg for retirement.

He had a very consistent style of playing and had built up an impressive bank roll. Something like $150,000. He was planning on chipping away for the next 15 years and turning it into $2M. In the meantime, he said, he was having fun and got ton of comps so he was always getting his meals free and crap.

I don't know whatever happened to him as I didn't stay there. I doubt that he's close to achieving his goal though, no matter how good he was. The guy was fat as heck and uber-unhealthy. I bet he's dead from a heart attack right now. Look's like the casino got back at him for taking all their money. All they had to do was keep giving him free cheesecake.
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i hate to be frank.

what you said about edge is great and insightful. however, this "1:2 risk/return is golden" is really amateurish, i mean the author.

20 random trades, ended up profitable, and that's sufficient to call 1:2 a golden RR ratio in FX business???
heaven, thank you for making my life so much easier.

but isn't that stats 101 on 1st day taught us that for the most simple study, at least 30 samples are a must??? don't mention the other elements in his experiement.......

Quoting FXAssassin
The Trump Card which all Forex traders have (but few take advantage of) is trading based on a 1:2 Risk/Reward ratio.
Quoting Yogi3o3
To keep it short, he basically compared trading as a less than 50/50 proposition and his style of playing craps as a 79/21 proposition.
Why would he assume it's 50/50 in FX? how can he assume something that he does not understand. This is a really an apple to apple comparison in terms of pro trading and pro gambling. Both win over its odds.
Underspeak, overdeliver.
x10 XAU No Miss Return This Year: 1,355.3%
Quoting hanover
{quote} From a mathematical standpoint, trading is arguably more of a gamble than casino games, because the odds can't be precisely calculated.
Odds can be calculated if the rule is strict enough if news element is not included =)
News outcome is truly random half of the time, so it is not suggested to have it included within the winning odds calculation.
Underspeak, overdeliver.
x10 XAU No Miss Return This Year: 1,355.3%
Quoting FXSayWhat
{quote} Odds can be calculated if the rule is strict enough if news element is not included =)
Odds can never be precisely calculated because the market always consists of a mix of unknown participants with unknown intentions. That is why multiple charts with the same price pattern can result in an unpredictable distribution of different outcomes.
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