Financial Trading is Like Fantasy Sports
Webster’s Dictionary defines gambling as “playing a game in which you can win or lose money or possessions,” or “risking losing (an amount of money) in a game or bet.” Taken very broadly, trading might possibly be seen as gambling. Every time you trade, you are risking money. But, trading is not a “game” and you are not laying down a “bet”. You are purchasing (or selling short) something of value (a stock, a futures contract, etc.) with the belief that your position will increase in value. If trading were gambling, then any investment is gambling.
The missing factor in this discussion so far is chance. Gambling is generally associated with games of chance: the lottery, playing craps, betting on sporting events. The law in the U.S. makes this distinction: betting on sporting events is gambling, whereas playing daily fantasy sports for money is not, as the latter is viewed as a game of skill, not chance. Similarly, trading is not viewed as gambling under the law as it a “game” of skill. Aside from that, it is a major part of the world economy.
So, why does trading often feel like gambling? Because, trading feels like gambling when you trade without skill and rely on chance. How many times have you entered a trade and hoped the price would go in your direction? Why are you entering trades if you don’t have a solid technical basis for entering that position? Of course, not every trade is going to go your way. There are factors and variables (chance) that no one can control.
Like in daily fantasy sports, you don’t know that players on your team are going to hit home runs or score goals or rush for over 100 yards that particular day. But you can analyze their recent performances and their matchups to determine who would be good have on your team. They could all be duds or you could hit the jackpot, but at least you gave yourself an optimal statistical chance, assuming you know how to properly analyze player performances, matchups and other factors such as weather.
You don’t pick random players. Although you might get lucky doing that every now and then. But, in the long run, a solid technical analysis system over the course of the entire season, should lead to positive results. Trading is the same. You don’t enter trades randomly, although you might get lucky doing that every now ant then. You do your research, you learn what statistics matter, you do your technical analysis, and enter trades (like picking players) that have an optimal chance of success.
Daily fantasy baseball, like trading, can seem rather random. There’s an incredible amount of variance in baseball, making it difficult to predict which players will do well on any particular day. One day a player might go 4 for 4 with 2 home runs and 5 RBI’s, the next day 0 for 4. But, the head of one of the leading daily fantasy sports content websites recently told me that 5% of the people playing daily fantasy baseball are winning 90% of the money. Think about that. Those people in the 5% really know what they’re doing, in a field that seems quite random.
You can do the same with your trading. With the right tools and approach, you too can be consistently profitable. Without them, … you’re just gambling.