Many gamblers feel attracted to the world of financial markets and online trading. Just like a casino, it offers enormous opportunities to get the adrenaline rush that gamblers are addicted to. However, is day trading actually gambling? What differs serious traders from gamblers? Let’s find out in the following lines.
What is Day Trading?
The way you trade the market shapes your trading style. There are four main styles in trading: scalping, day trading, swing trading, and position trading. Scalping is the most fast-paced of them, swing traders hold their trades for a few days to a few weeks, while position traders are the very long-term traders and hold their trades for months.
Day trading falls somewhere in between scalping and swing trading. Day traders analyse the market early in the morning, open trades and close them by the end of the trading day. This way, they’re not exposed to overnight risk, but the potential gain is also lower than in the case of swing and position traders.
Since day traders open up to a few trades per day, transaction costs can become quite an issue. This is especially true if a day trader closes his or her positions late in the evening when market activity is low and spreads rise. However, trading costs with day trading are still considerably lower than with scalping.
Usual day trading strategies include trend-following, counter-trend trading, and breakout trading. A trend-following day trader opens positions only in the direction of the overall trend. If the trend is up, a trend-follower enters only with long positions. Similarly, if the trend is down, the trader would enter only with a short position.
Knowing when to enter into a trend is equally important as following the trend itself. The best time to enter into a trend-following trade is at the end of a price-correction. Traders usually use channels and Fibonacci retracement levels to identify the end of a price-correction.
Counter-trend trading involves opening trades in the opposite direction of an established trend. Counter-trend trades are very risky and should only be considered by experienced traders.
Finally, breakout trades are based on breakouts out of important technical levels, such as support and resistance levels and various chart patterns. Breakout day traders often use pending orders to catch a trade even if they’re not in front of their computer.
This was a brief introduction of the day trading style. You need to know the basics first before we dig deeper into the main question: Is day trading gambling?
Let’s find out.
Is Day Trading Legal?
Day trading is legal but can be quite risky. Major financial regulators became aware of the fact that many day traders are actually losing money on the market.
There are many reasons for this: first, many beginners and gamblers feel attracted to day trading as it offers a relatively fast-paced trading environment. They can open multiple trades during a day and know whether they’re in profit or loss by the end of the trading day.
To protect retail traders from losing, regulators have introduced the term “pattern day trader.”
According to FINRA, “[a pattern day trader] … includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.
Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.”
In other words, if you’re trading on margin and open four or more day trades during a week, you’ll have to maintain a minimum trading equity of $25,000. This rule is established to prevent inexperienced traders with small trading accounts from losing money. Regulatory authorities know the risks involved with day trading.
What’s the Difference Between Trading and Gambling?
Ask any professional trader what’s the outcome of his next trade, and we’ll say that he doesn’t know. The probability of every single trade is like flipping a coin – there’s a 50% chance of winning and 50% chance of losing. It’s only in the long run that professional and profitable traders know that they’ll be in profit.
Trading is a long-term game, but many people feel attracted to its short-term excitement. For gamblers, the market acts as a casino, only that the devastating effects on an individual can be much larger. Nothing protects a gambler who’s trading from a financial disaster, only the single click of a mouse before opening a trade.
- Gamblers love the rush of trading
Gamblers are attracted to financial markets as it offers a painfully easy way to gamble. When trading on leverage, the stake is even higher.
Many brokers offer a 20:1 leverage for stock trading and a 100:1 leverage for currency trading. This means that with each dollar deposited, a gambler can control $20 on stocks and $100 on the Forex market.
Gamblers are addicted to the adrenaline rush when a trade is closed with profit. However, this inability to control their emotions makes them easy prey for the markets.
After they lock in profits, they’ll increase their bets and open a larger position size the next time they trade, until the market turns against them and wipes out their entire trading account. Have you ever won a sports bet? If yes, did you increase your bets the next time you played?
- Gamblers trade without risk management
Gamblers don’t only trade with emotions, but also with a dangerous absence of market analysis and risk management. Their goal is to trade, not to analyse charts and control risk. A winning trade provides them with the necessary dopamine rush, while a losing trade causes great pain.
Gamblers don’t like risk management, it’s against the foundations of gambling. Rather, they don’t use stop-loss orders at all and hope that a losing trade eventually reverses.
- Trading is a business
To be a profitable trader, you don’t have the luxury to think like a gambler. Trading is a serious business. Many traders invest years of learning before they finally become consistently profitable traders.
Consider trading like a full-time job. Analyse the market, and only take trades that are in line with your trading strategy. Remember, money is not made with trading, but when holding trades and controlling risk.
Can Someone Have a Day Trading Addiction?
It’s totally possible that a trader becomes addicted to day trading, especially in the early days of his trading career. Financial markets offer incredible opportunities, both to reach the stars and to hit the bottom.
How can you know whether you’re addicted to day trading?
- Do you trade only for the sake of trading?
- Do you widen your stop-loss levels in a losing trade?
- You always have to have an open trade, even if there are no trading opportunities?
- You feel invincible when you lock in profits and devastated when your stop-loss is hit?
If the answer is “yes”, you’re probably addicted to day trading.
Checklist: How to Trade the Smart Way
In order to avoid the gambling trap and start to trade like a real trader, here’s a quick checklist of how to trade the smart way. If you fail to utilise even one of the points the next time you open a trade, you’re gambling.
- Build a Trading Plan – A well-defined trading plan includes your trading strategy, style, risk management rules, entry and exit rules, position sizing and any other element you may consider important to your trading. When analysing the market, you need to have a trading plan to know what you’re doing and what trade setups you’re looking for. It’s like a roadmap for traders.
- Learn About Risk Management – One of the most important parts of trading is risk management. We can’t control what the market will do the next second, hour or month. It can either go up or down. However, what we can control is our risk. Have a pre-defined risk level for every trade you take, and stick to it religiously.
Many traders use the 2% and 6% rule in trading. The 2% rule says that the total risk of any single trade shouldn’t exceed 2% of your trading account size, while the 6% rule sets the maximum loss of all open trades to 6% of your trading account. You can open up to 6 trades with a 1% risk-per-trade, but only 3 trades with a 2% risk-per-trade.
- Keep a Trading Journal – Another element often neglected by gamblers is a trading journal. Trading journals consist of journal entries that include the price at which you took a trade, the date and time, the trade direction (long or short), the position size, the entry trigger, your stop-loss and take-profit levels and any other field you perceive as important.
Trading journals are also a great tool to enhance and improve your trading performance. Make regular retrospectives of your journal entries to spot common mistakes you’ve made in trading. Is there a specific chart pattern that always ends with your stop-loss being hit? Do you enter into trades too early, before they’re confirmed? Adding a screenshot of the price-chart to your trading journal may also help.
- Control Your Emotions – If you don’t want to be a gambler, you need to learn how to control your emotions. Emotional trading is likely one of the most common mistakes made by beginner traders. Greed and fear interfere with your decision-making process.
Day trading is one of the four major trading styles and involves opening trades in the morning and closing them by the end of the trading day. Most day trading strategies can be grouped into three main categories: trend-following, counter-trend trading, and breakout trading.
Gamblers are often attracted to day trading as it offers a fast-paced trading environment with incredible opportunities. They feel enormous joy when the market goes in their favour and pain when the market goes against them. To replicate the rush that they feel with winning trades, gamblers often increase their position sizes until they blow their account.
Trading is not gambling. It’s a serious business that requires patience, discipline, and experience. Professional traders know the importance of having a trading plan and strict risk management rules. And if you really want to succeed, controlling emotions should also be on the list.