Is Day Trading Gambling?

Is Day Trading Gambling?

Share it with your friends

An Important Day Trading Lesson I learnt from Gambling (Roulette).

A lot of times I’ve heard people say that investing in the stock market is gambling. A few months ago I had a conversation with a CA, he asked me “Do you trade in the stock market?” To which, I replied “Yes, what about you?”

He said that the stock market is like a casino and everyone loses money. So if you’re looking for the answer, trading is NOT gambling. I’ll prove it to you using mathematical examples.

The 4 Types of People-

  1. Amateur traders.
  2. Amateur Gamblers.
  3. Professional Traders.
  4. Professional Gamblers.

The first two types of people stand no chance making money long term. An amateur gambler is a person who plays cheap slot machines or someone who bets all his money on his lucky number 7 on a roulette table.

An amateur trader is someone who uses 10x leverage and buys a stock just because the stock is trading near its 52 week low price (Buy Low, Sell High. Stonks gang) without using a stop loss or any risk management whatsoever.

These people will not make money in the long run. But what about professionals?

A professional gambler or a trader uses proper risk management system and position sizing, and only bets when the odds are in his favour.

Let’s talk about Roulette.

Roulette is one of the most popular casino games. I’m using it as an example in this article. I won’t consider poker because I personally don’t think that playing poker is gambling (If you play in ranges). Slots are for *******.

The house has a 2.54% (UK) edge in Roulette and a 5.23% edge in American roulettes. Anyone with a little bit of experience can tell you to avoid American roulettes.

There are 4 commonly used strategies when it comes to playing roulette-

  1. The Martingale System.
  2. The Reverse Martingale System.
  3. James Bond Strategy.
  4. Fibonacci.

If you have no idea what any of these mean, you probably are better off not playing roulette. Out of these four the martingale system is probably the most famous one, but the major drawback is that you can go bankrupt really fast.

If you bet will 100 bucks, and there are 11 losing bets one after one (it is possible, I backtested the strategy in about 250 games), you’ll lose 204,700 bucks.

The most favourable strategy is the James Bond Strategy. Let’s look deeper into it.

Rules-

  1. Bet 10 bucks on 0.
  2. Bet 140 bucks on 19-36 range.
  3. Bet 50 bucks on 13-18 range.

If your capital is 10,000 bucks, each trade will cost 200 bucks, which is perfect considering you shouldn’t risk over 2% of your capital in a single trade. That’s a perfect risk management system.

The winning probability of this system is 67%, which is astronomically high! You definitely have an edge in this system, right?

Not really. You definitely have an edge, but a casino is not so dumb to lose money. Even though you have an edge, you have an unfavourable risk reward ratio.

The average win in this system is 80 bucks, so you risk 200 bucks to win 80 bucks. That’s a 0.4 Risk Reward Ratio. That’s not good.

By Risking 200 bucks to make 80 bucks with a 67% win rate, you will end up losing money in the long run.

I played roulette 100 times with this strategy (computer algo) with 10,000 as capital and used the James Bond Strategy. I won 67 times, each time I won, I got 80 bucks profit but each time I lost, I lost 200 bucks.

Here are the results-

My capital shrunk to 8870. I lost 1130 bucks. Even though the odds were in my favour, I still lost 11.13% of my capital in 100 trades (bets).

This teaches a significant lesson about risk reward ratio. If the risk reward ratio isn’t favourable, you WILL LOSE MONEY in the long run.

To improve the risk reward ratio you’ll have to decrease the winning probability. You can’t have a high probability and a good risk reward ratio in roulette. That’s why you lose.

But trading is different.

I ran the same system in MS Excel, the win rate was the same, 67% but the risk reward ratio was 1.5 instead of 0.4

The Result- My capital expanded to 23,700.

That’s 100%+ return over 100 trades with 67% win rate. A 67% win rate isn’t very hard to achieve. It’s fairly easy. With proper risk management & position sizing, and a good win rate along with a decent risk reward ratio, I ended up making a huge return.

If the risk reward was 2 instead of 1.5, my end capital would be 30,200. It may seem too good to be true, but it’s possible.

Of course, this won’t happen in a day. You probably can’t find winning trades with 1.5 risk reward ratio daily, but even if you trade once every 2 trading days, you’ll double your capital in a year.

Trading is a bit different from gambling, you have a lot of historical data, you can backtest your strategies and only bet when the risk reward ratio is favourable. Plus, the odds can be in your favour if you implement the right strategies.

“If the odds are in your favour and the risk reward ratio is favourable, with proper risk management you can blindly take the trade. You’ll almost always win in the long run”.

-Vikrant C.

Twitter

Profitable Day Trading Strategy.

Should you Buy/Sell Tata Motors- The Complete Technical Analysis

How to Design an Algo Trading Strategy in 3 Easy Steps | Algorithmic Trading in India Explained.

 

 

close
close

Leave a Reply

Your email address will not be published. Required fields are marked *