Casino Royale: Gambling or Trading?

Casino Royale: Gambling or Trading?

A trip to Atlantic City. No fist pumping, but an interesting story. Traders trying to beat the house to boost their trading accounts. What can a casino possibly teach us about a trader’s psychology in the post-QEInfinity world?

The old adage maintains the house has the odds stacked against you in a casino. What if the same effect was rigged across the broader market? Or is that just the mantra of the doom and gloom talking heads.

“Gambling is taking a risk when the odds are against you.  Speculating is taking a risk when the odds are in your favor.”  Victor Sperandeo

Many new traders take a gamblers approach to trading which is a fundamental error that inevitably results in a complete drain of equity. This leads many of these traders to come to the conclusion that there is a parallel between trading and gambling, and in some cases these traders believe that their odds are slightly better at the casinos than they are in the markets.

I recently met with a group of traders in Atlantic City at one of the local casinos. In one of my conversations a with novice trader, a man was detailing his game plan of approaching the market. The journey started with a trip to the tables from which he planned on doubling his trading capital believing that his odds there were slightly better than in the market… We all know how this story is going to end, the point is that this is a genuine belief that must be reconciled if you are going to take your trading to the next level.

The key difference between the “trader” and the “gambler” rests within the fundamental and technical approach. A trader is looking at all of the variables; projections are made after a complete analysis of the charts from monthly timeframes all the way down to the hourly or fifteen minute timeframes. And then as a secondary confirmation of the trader’s projection, the news, current events and other relevant information is explored. What are the key things going on that could affect the initial projection and what is the alternate game plan?

The Gambler’s approach to the market is very simplistic in nature and feels a lot more like “rolling-the-dice” than the traders approach. The gambler may start by reviewing the news or economic indicators coming out of the country and then will place bets accordingly. For example, if the gambler anticipates that the non-farm numbers are going to be lower than expected he may choose to short the dollar. The problem with this approach is that there is a 50/50 chance that he will be right.

Since 2008 the psyche of the average trader has taken hit after hit. They saw the Dow drop through the basement only to double on the back of QE. The EU crisis. The Arab Spring. Saber rattling across the Middle East and Asia. IPOs turn into disasters within weeks. Facebook. Zynga. Pandora.

The key is to keep it simple. Return to the fundamentals. They scream about fundamental football on sportscenter all day, what about a return to fundamental trading.

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