Stock Trading VS Gambling

I frequently asked myself these couple questions. Is trading stock equal to gambling? Are you an addicted gambler if you are tempted to trade stocks? I answer both questions, “NO”. These are the answers that I prefer. But I really don’t know whether I answer these questions based on my own bias.

I answer both questions based on a fact that I believe to be true. I already mentioned that in my blog mission. It is that when you are gambling you are always playing on the side that statistically the probability of losing money is always higher than the probability of winning money. You may win from time to time in gambling but if you are playing long enough or the number of times you play is large enough there is only one out come and that is you lost. That is how the casinos games are designed. Interestingly a lot of people keep playing in an attempt to win their money back. Casino will tell you who won a million but they won’t tell you who lost a million. It is a marketing effort to entice you to keep playing. People have no problem sharing their joy and victory with the public but they tend to keep the sadness and failure within their closest friends and family.

Theoretically there is one casino game that you can beat the dealer. And that game is black jack. There are all kinds of card counting strategy out there telling you how to beat the dealer. And those strategies have one common nature that is to identify a situation where the probability of wining is greater than losing and increase your bet accordingly. I believe the same applies to stock market. The stock market is emotional and it derails from reality from time to time. The more it derails the high the probability it will heading back toward the rational level. If we can identify those irrational price levels and take the right side then the chance of making money is higher then losing money. If we are always able to find the irrational level and trading on it long enough then we should be able to see substantial gain. With that said I am not saying you will make money on every trade. I mean if you are able to do that you will find you can win more and lost less.

Well I am just talking and I am trying to prove my point with my blog. Successful or not time will tell. Nevertheless the hard work lays in how to identify those irrational pricing. That is the critical part. In traditional financial theory those irrational price is not existing because the market is efficient enough to prevent them from appearing. That is so called the efficient market theory. In that theory no one is able to beat the market index in terms of return per risk. But we can see this market is far from efficient with all kinds of manipulation in place.