Are You Investing Or Gambling?
Merriam-Webster dictionary defines gambling as:
1. a. to play a game for money or property
b. to bet on an uncertain outcome
2. to stake something on a contingency : take a chance.
When trading is looked at, gambling takes on a much more complex dynamic than what is presented in the definition. Many traders are gambling without even knowing it; trading in a way or for a reason that is completely dichotomous with success in the markets.
In this article we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place.
Hidden Gambling Tendencies
It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. And yet discovering of what drives us to take certain actions can create change within us as the underlying motivators are discovered by the conscious mind.
Before delving into gambling tendencies when actually trading, there is one tendency that is apparent in many people before trading even takes place. This same motivator continues to impact traders as they gain experience and become regular market participants.
Social Proofing
A person may not even have an interest in trading or investing within the financial markets, but social pressures induce them trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market). The person feels pressured to conform by their social circle. Thus they invest so as not to disrespect or disregard other's belief's or feel left out.
Buying some stocks or placing some trades in an effort to appease social forces is not gambling in and of itself if the person actually knows what they are doing, but entering into a financial transaction without a solid investment understanding is gambling... regardless of what the social media will portray. This person lacks the knowledge to exert control over the profitability of their choices. There are many variables in the market, and misinformation or disinformation within the investor or trader creates a gambling scenario. Until knowledge has been developed that allows the person to overcome the odds of losing, gambling is taking place with each transaction that occurs. (For a primer on how stocks work, check out our Stock Basics Tutorial.)
Contributing Gambling Factors
Once someone is involved in the financial markets , there is a learning curve, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. Depending on how the person approaches the market will determine if they become a successful trader or remain a perpetual gambler in the financial markets. The following are two traits (among many) which are easily overlooked but contribute to gambling tendencies in traders.
Gambling (Trading) for Excitement
Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing money in the markets, losing money on a trade will allow that person to enter the conversation with a story of their own. When a person trades for excitement or social proofing reasons, it is likely that they are trading in a gambling style rather than in a methodical and tested way. Trading the markets is exciting ; it links the person into a global network of traders and investors all with different ideas backgrounds and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows is likely to detract from acting in a systematic and methodical way.(Learn about how emotions can interfere in trading by reading Master Your Trading Mindtraps.)
Trading to Win, and Not Trading a System
Trading in a methodical and systematic way is important in any odds based scenario. Trading to win seems like the most obvious reason to trade, after all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. While making money is desired overall result, trading to win can actually drive us further away from the realization of making money. If winning is our prime motivator, the following scenario is likely to play out: Jill buys a stock as she feels it is oversold compared to the rest of the market. The stock continues to fall, placing her in a negative position. Instead of realizing that the stock is not simply oversold and that something else must be going on here, she continues to hold the position, hoping it will come back so she can win (or even break even) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions because to do so would be to admit they lost on that trade.
Good traders take many losses, they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions once original entry conditions have changed or turned negative for the trade means the trader is now gambling and no longer using sound trading methods (if they ever were).(Read about some of the common trading methodologies in our Stock-Picking Strategies Tutorial)
Conclusion
Gambling tendencies run far deeper than what most people initially perceive, and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted which result in taking action in a field they know little about. Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, not trading a system which is methodical and tested, but rather relying on emotion or a must-win attitude to create profits shows the person is gambling in the markets and unlikely to succeed over the course of many trades.
