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Is Retail Futures Trading The Same As Gambling?

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This article on futures trading and gambling is the opinion of Optimus Futures.

“You can lose everything trading futures!” That is what we’ve been told. Another thing we have probably heard from skeptics: “If you’re going to lose your money, then why do it on futures when you can actually enjoy losing money slower at a casino?”. So, there you have it: the common conception that retail futures trading is tantamount to gambling. Fast money made, fast money lost.

But is it entirely true? What are the similarities and differences between a skilled gambler and a skilled futures trader? Is a long or short position in the S&P 500 futures the same as a black or red position on the roulette table?

If you say YES, you are likely wrong, depending on how you view it. If you say NO, you also might be wrong, depending on how you view it. This probably does not make sense to you. So, let’s examine this further and flesh out the similarities and differences. But first, a story.

Let’s Play “Who’s the Trader?”

Let’s imagine three hypothetical traders named Jim, Jeff, and Julia. All three traders were looking to make a profit off the S&P 500 as market sentiment seemed to be running hot toward the upside.

Jim had a gut feeling that the S&P 500 futures (ES) might move up following the previous day’s pullback. He took a small position on a hunch after reading the news. He speculated the Federal Reserve’s near-zero interest rates would continue to buoy companies and, by extension, their share prices. After all, the S&P 500 is diversified across multiple sectors, more or less evenly unlike the Nasdaq index futures, (NQ) which is tech-sector heavy.

Jeff used indicators, order flow software, and other technical price action setups to get in on his trade. He came to the same conclusion as Jim–that the S&P 500 had plenty of upside to go. So, he opened up a huge position three times Jim’s size .

Julia did the same as Jeff–he constructed his setup using indicators, analytics software, and he went as far as consulting analyst forecasts. He, too, saw plenty of upside for the S&P 500. But his position size was small, equal to Jim’s.

The S&P 500 advanced by 20 points that day, but only two came out winners.

  • Jim closed his position taking in the full 20-point return.
  • Jeff would have made it had it not been for his oversized position, which caught him under margin on one of the downside fluctuations; he was “auto-liquidated” by his broker.
  • Julia finished the day taking in the full 20-point return, just like Jim.

So, who was gambling and who was trading? The answer is that Julia was the only trader while the other two were gambling. How so?

Jim was trading off his gut with no real tactical or strategic setup. He didn’t have a clear picture of the odds. Instead, he was just lucky that the market went his way. That’s gambling.

Jeff took a very strategic trading approach like a responsible trader. However, his money management strategy via position sizing (if he even had one) got the best of his setup and took him out of the market. That’s a gambling move, not a calculated risk.

Julia calculated her odds and took her best shot knowing well that the market might move against her. Fortunately, it didn’t trigger her stop loss and so she benefited from the entire market move.

A gamble is a decision that leaves more to chance than to pre-calculated moves . A trade, on the other hand, is a calculated risk taken with the best probabilities in mind.

The Lesson: You can have the same trade and same outcome while approaching it from two different perspectives–that of a trader and a gambler.

Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders

ALSO READ | Confessions of Unsuccessful Futures Traders & The Lessons You Can Learn From Their Mistakes

We’ve heard that Wall Street is the world’s biggest casino. You can include the Chicago commodities exchanges along with that. But are trading institutions prone to gambling in the same way that retail traders often unwittingly are?

Oversized Risks Among Retail and Institutional Speculators Versus Hedgers

The more you understand and gain experience in trading, the less of a gambler you become. Remember, a gamble leaves a greater portion of the outcome to the unknown .

There are several ways to gamble without even knowing that you’re gambling:

  • You’re profitable in simulation mode but you’ve never tested your “theories” in the live market. So, no matter how well you stack the odds in your favor, your incursion into live territory is something of a gamble –until you get accustomed to it and learn how to trade in a live environment.
  • You’re a careful trader but there’s so much yet you don’t know. Suppose you become successful in the months or years to come. You would then look back at how you used to trade and you’d probably consider it a gamble in light of your then-ignorance.
  • You’re a skilled technician who’s made a fortune and fallen into the habit of trading a very particular way. You didn’t notice that the larger economic environment changed in a manner that impacted your setups. One day, you take a huge loss simply because you’re not in the habit of checking the larger fundamental environment. Every calculated trade you made has just been rendered into a lucky gamble by sheer happenstance.

These erroneous factors and their many variants are NOT the sole domain of the retail investor, they also happen among larger institutional funds as well.

That’s how institutional funds blow up–by underestimating risks that could have been avoided had they taken such foreseeable risks more seriously.

Another example: many well-intentioned financial advisors might give you the best possible investment advice based on common dollar-denominated instruments. This happened in the 1970s. Many weren’t paying attention to the inflationary surge. At that point, sticking to financial instruments that derived their ultimate value from US dollars was a huge gamble, no matter how knowledgeable, calculated, or well-intentioned the advisors may have been.

It’s a complicated matter because you can’t hedge the risks that you aren’t aware exists. And there are always risks of which you aren’t aware. So, in a way, there is a bit of gambling in any calculated risk.

The difference: gamblers knowingly enter a game that’s skewed in favor of the “house,” whereas traders try to skew the advantage of the “house” in their favor.

Institutional hedgers are a whole different lot of traders. They’re trying to eliminate risk and speculation by freezing the price of a given commodity. Whether a futures contract goes up or down, their aim is to keep the cost steady by betting against what they already own or need to own.

It doesn’t matter if, say, corn futures rise or fall. Whatever price they’ve locked down, they are either going to deliver it at that price or buy it at that price. Hedgers are anti-speculators. Their speculation is in the forecast of demand for production–as a commodity producer or consumer product manufacturer. They have very little to do with the retail or institutional fund speculator.

Futures Gambling at Its Finest

Perhaps the best way to learn to avoid gambling in the futures markets (a futures trading gambling hybrid) is to illustrate the mindset of a gambling trader.

You are gambling in the futures markets if…

  • You’re not calculating your position size to match your risk limits.
  • You don’t have pre-determined risk limits.
  • You trade without a stop loss.
  • You trade off sentiment, hope, and excitement rather than calculation, odds-stacking, and calm–remember, hope is not a strategy.
  • You trade without looking at a weekly economic calendar.
  • You trade directionally but can’t see the longer-term and shorter-term trends surrounding your trend in focus.
  • You’re not seeing major support and resistance from a larger time frame.
  • You are trading technically without looking at the larger fundamental picture.
  • You are trading fundamentally without looking at the smaller or larger technical picture.
  • You are trading sentiment but not analyzing sentiment through various indicators that can help you determine whether your reading of sentiment is correct or incorrect.
  • You revenge trade to make up for past losses.
  • You “average down” — chasing after bad money with good when you can’t give a rational reason why you’re doing it (corollary: you’re a poor trader if you refuse to “average down” when the fundamental and technical scenarios make such a move favorable).
  • You don’t use enough indicators to give you multiple perspectives on the price action.
  • You use too many indicators that confuse your perspectives on the price action and slow down your responses.
  • You rely too much on the “gut” to compensate for a lack of knowledge.
  • You rely too much on (static) knowledge, not allowing your strategy to flexibly accommodate your intuitive (“gut”) decisions.
  • You use a lot of indicators but don’t know how to integrate them.
  • The way you integrate your indicators is not flexible to the changes in the market.
  • You opt for frequent payouts that are dwarfed by i nfrequent negative payouts (the risk-to-reward ratio is badly skewed against you).
  • You recklessly jump from trading system to trading system, not sticking to something that might work.
  • You stick to a system that has consistently violated its previous performance metrics.
  • You don’t understand how to evaluate performance metrics.
  • You understand performance metrics but don’t realize you’re incapable of assessing them at your stage of trading experience.
  • You’re too focused on immediate results.
  • Your decisions are overly-affected by your most immediate results (recency bias).
  • You seek reasons why your approach might be right despite evidence that it may be wrong (confirmation bias).
  • You’re not constantly seeking what you don’t know in the markets.
  • You follow a trading guru without seeing hard evidence that your guru is actually making money in the market (versus making money on your tuition).

Perhaps this covers most of it.

The Bottom Line: It’s All About Method, Management, and Constant Questioning

What separates a trader from a gambler is not necessarily knowledge, technology, or even experience. It is a mindset toward practical method –to construct or execute a practical method that, to the best of his or her ability, is sound. Not all methods are sound, but you have to know the ins and outs of it to know whether it’s unsound or just having a bad streak.

It is also an approach to risk management –to have a variety of position sizing and risk management strategies to use or when the market conditions change. You have to know the difference between defensive and aggressive position sizing strategies, and this must take place within a larger risk management plan.

Constant questioning is what will help you avoid system death (when a system stops working for the long term due to changes in the market environment) or following a losing system (because you didn’t assess it correctly or it misrepresented its performance metrics). If you can’t doubt yourself or your system in a constructive way, then you’re fated to be fooled by just about anything in the markets, most importantly yourself.

As there’s a “trade” in every gamble (it’s a transaction), there’s always a little bit of a “gamble” in every trade. Some traders can be more “impulsive” than many gamblers (that’s the stereotype, at least) whereas some gamblers are more cunning and calculated than most traders.

But trading is NOT the same as gambling outright. The odds in trading can be theoretically stacked in your favor based on method and management. The rules of the game in a trade can be improved based on constant questioning and method alterations. Whereas, in most casino games (most but not all), the odds are stacked in favor of the house. The rules of the game cannot be changed. And therein lies the differences that distinguish the two.

Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Great to see how trading is separated from gambling.
Most of the struggle is what not to do and yet we do anyway.

@Mod-MattZ this will be good to go over tomorrow.

What I take from this are a few things.

The first is the “noise” of people having an opinion of the market being a gamble or even pre-determining that you will lose money. If we aren’t careful, we can carry those beliefs into the market with us despite them not being our thoughts in the first place! Essentially letting the outcome be determined by someone else’s opinion, when we say that out loud it’s absurd, but it happens all the time.

Aside from execution and market knowledge, the easiest and biggest hurdle to overcome is the mentality going into trading.

I think it’s all about how you approach it.

If I go into a casino I have already decided on a few things: I’m going to be drinking, having fun, and socially gambling.

I would say the majority of people who visit casinos would feel the same. Therefore there is an assumption already about what “gambling” is. That has long been the perception of trading, that it’s a “gamble” as well.

Most traders are up early, preparing for the trade, devising a plan, etc. They take it seriously.

I’d bet if we flipped the tables and gamblers took gambling seriously, planning, staying sober, looking for opportunity, they may make better decisions and have more luck on their side.

If traders started acting like the typical “gambler”, we would start to do a bad job:

Intoxicated and missing prices, making errors.
Sleeping through trades.

You get the Picasso I’m trying to lay down here.

The more impeding point is how can we look at these different contrasting points of view and use them together for positive change?

Let’s go through a quick exercise:

  1. For this we will take casino gamblers and write down the things they do to consistently lose money.

Intoxicated - Poor decision
Can’t focus on the game
Angry at a loss - Bets more

Here’s how the general public hears it, then repeats the same message which cycles, and many phrases and beliefs stick.

However, this is how we traders should take that info to build a rock-solid trading plan:

Trader 1

  1. Belief - That trading is the same as gambling.
  2. Belief - Gamblers typically lose lots of money.
  3. Merged Belief - Since I’m a trader and that’s gambling, I probably won’t make anything.

We can see that process in 3 steps. Which processing that in the brain takes a few millionths of a second. Here’s the scary part, if that belief enters and stays, never gets discussed, until you change the reasoning behind those beliefs, the beliefs will stay strong.

Now we are asking, how does this trader disassociate those beliefs and fears?

I’d work backward, the merged belief that traders are gambling and when you gamble you lose money.

Asking things like:

Are traders REALLY gamblers? It seems very different to me.

I do see gamblers losing money, but I actually see more traders making way more money.

This can be applied to anything and is super easy to correct with enough repetition.

Etc, etc, many etc’s,. Fun topic though and with the mentality part brought in with order flow, we will start picking up some solid strategies together.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.