Trading & Gambling. A lot of people say ....trading is a gambling and a lot gamblers ultimately lose money. So is the trading gambling??. Or maybe should we ask "who are the consistent winners in gambling"... In gambling the consistent winners over the long term are the casinos. So is it possible in trading to operate like a casino and be a consistent winner? To understand how casinos win consistently, you first have to understand the concept of Expectancy which is defined as follows: Expectancy = (Probability of a win X Actual Gain) minus (Probability of a loss X Actual Loss). Let's take the game of Roulette where there are 36 numbers for you to bet on. If you bet $1 on any particular number and win, the casino will pay you $2. If you lose, you lose your $1. The variables are as follows: Probability of a win = 1/36, Actual Gain = $2 (the casino pays you $2 if you win) Probability of a loss = 35/36 Actual Loss = $1 (you lose your $1 if you bet the wrong number) Plug the numbers into the above formula for Expectancy and you get minus 0.92. This means in the game of roulette, the expectancy is "negative" to the gambler. If you play a game with negative expectancy you will eventually lose all your money. Another way to think of expectancy is whoever has positive expectancy in a game has the "edge". In the case of roulette, the casino has positive expectancy and has the "edge" over the gamblers. Ever wonder why casinos give gamblers free meals, free hotel rooms, and air tickets? Apart from attracting gamblers, they want gamblers to stay as long as possible because when gamblers play a game with negative expectancy, it's a mathematical certainty that they will "eventually" lose all their money if they play long enough. How else do you think Stanley Ho and Steve Wynn made their billions? So in trading, how do you structure yourself to think and act like a casino? Few suggestions below. 1. Every game in the casino has clearly defined rules on how it is played. So in trading, you must have clearly defined rules governing entry, stop loss, exit, and position sizing - a trading methodology. You simply do not make bets in trading based on your whims. And over many trades your trading methodology must have "positive" expectancy (there is a way to measure this). 2. You have to size your bets appropriately so that no series of losing trades will take you out of the game. The casino doesn't bet the house on a single bet. Rather it has enough working capital to weather the "inevitable" losing streak. The same in trading. 3. The casino take every single bet from gamblers and doesn't try to choose and pick its bets. While the casino may lose on individual bets but over many bets, the odds of positive expectancy plays out to the casino favor, i.e. they make a net overall profit. Likewise, in trading you have got to take every single trade signal of your trading methodology and not attempt to pick your trades (it simply cannot be done). Most losing traders spend their entire life trying to predict markets and avoid losses. 4. Be totally disciplined and consistent. The casino stick to the rules and doesn't change the way it plays the game irrespective of whether they just have 10 winning bets in a row. In contrast, most traders start to get carried away when they have a series of winning trades. They start to bet bigger and deviate from their rules and they eventually blowout (think Long Term Capital Management). There are old traders and there are bold traders but there are very few old and bold traders. - Ed Seykota. It takes 3-5 years (and sometimes longer) to acquire the above "basic" trading skills. During this period you make no money and frequently lose money. This initial "starving phase" is most difficult and mentally damaging to go through. That's why 95% of people who attempt trading don't make it. But the payoff is well worth it for those with the determination to go through it. So to sum it up, trading is gambling. But in trading, just like in gambling, you can be a consistent winner by being the house.