DislikedNo one has really hit the nail on the head here... When you GAMBLE (say, place 10 chips on the inside of a roulette table), you are expected to lose money determined by the odds of the game. The odds in gambling are ALWAYS NEGATIVE, ALWAYS. Let's say you want to randomly purchase positions on different currencies... the expectation is UNKNOWN. You are not expected to lose or win, it can go either way, and you can determine when to pull out... There is no possible way to make money gambling, the more you gamble, the more you lose, THIS IS MATH.Ignored
If someone has one die and he says, "If you roll a 1 or a 2, you have to pay me $1. If you roll anything else, then I will pay you $1."... then I would definitely say "yes!" to this game. This is not gambling. There are only 6 possible outcomes of rolling the die 1, 2, 3, 4, 5, 6. And in four of these outcomes, I win $1. I lose $1 for only two of the possible outcomes. Even though I have no idea what number will come up when I roll the die once, I do know that in the long run (because of the law of large numbers), I will make money because I will win about 4 out of 6 times (or 2/3 of the time), and I will only lose about 2 out of 6 times (or 1/3 of the time) -- and in this case, the size of every winner and loser is the same.
If I played this game with Bill Gates, I would slowly take all of his money.
This is not gambling because I am "expected" to win, "expected" in the mathematical sense of the term. In other words, my expected return is positive.
Expected Return = (Average # of winning trades)*(Average size of a winner) - (Average # of losing trades)*(Average size of a loser)
In this example, on average, I will win 4 out of every set of six rolls of the die, and my average number of losing "trades" (or rolls of the die) is just 2. The average winner is $1, and the average loser is $1. Therefore my expected return is...
Expected Return = (4 wins)*($1 per win) - (2 losses)*($1 per loss) = $4 in total winnings - $2 in total losses = + $2 gain. I am expected to win $2 every time I play a set of six games, on average. Another way to look at this is, we could divide everything by 6 and get the average expected return per trade/roll:
Expected Return per Trade = (Percentage of winning trades)*(Average size of a winner) - (Percentage of of losing trades)*(Average size of a loser)
Expected Return per roll = (4/6)*($1) - (2/6)*($1) = (2/3)*($1) - (1/3)*($1) = $0.6666... - $0.3333... = $0.3333.... I am expected to make about 33 cents on average for each roll. Of course I will never make 33 cents on any roll; I'll either make a dollar or lose a dollar, but it averages out to a positive gain of 33 cents per roll. And because the expected return is positive, this is not gambling in my book.
Not every game at the casino is gambling for every player. If you are betting money on red or black at the roulette table, then that is definitely gambling. Because of those one or two green zeroes, that slightly tips the edge in favour of the house. You will have a slightly negative expected return, and the house will have a slightly positive expected return. (Who wins in the long run? You're gambling. The casino is trading. Trading entertainment for money is their normal business, and they make thousands of trades every day with very slightly positive expected values.)
For a professional poker player, on the other hand, he is not really gambling (according to my definition). The very fact that a he came come back day after day and play poker for a living means that he is making money in the long run, and because he's making money, he must have a positive expected return, and therefore, he's not gambling. As the law of large numbers kicks in, he gradually "grinds out" and profits from his playing. Even though, just like with the die, he doesn't know exactly which cards will come up, he knows when to hold 'em, when to fold 'em, and -- most importantly for his edge -- he knows how to read other peoples expressions. He especially knows how to read the emotions of an amateur, and he knows all the kinds of mistakes amateurs make. This is what gives him his edge. All the amateurs at the table are gambling; the professionally poker player is trading.
The markets are the same: Either you're an amateur who is gradually (or quickly) losing money in the long run, in which case we could say you're gambling -- or you are a professional who is gradually making money in the long run. Just as you cannot be guaranteed exactly what number you will roll with a die, or exactly which cards will come up next in a poker game, you cannot be certain what will happen next in the markets. However, if you have some strategy/technique/system that gives you a positive expected return, then you know that your average winning trades are large and/or frequent enough to outweigh the relatively less frequent and/or smaller losses.
You can achieve a positive expected return in a few ways:
- You have many small wins that outweight your larger, but infrequently losses.
- Or you could have a few very large wins that outweigh many many small losses.
- Or, ideally, you'd have many large wins and losses that are very small and very infrequent.
If total gains > total losses, you're trading. If total gains < total losses, you're gambling. And if total gains = total losses, that's just free entertainment.