Is daytrading a form of gambling or is it a respectable form of investing? That's what I argued about with fellow columnist Gary B. Smith on last weekend's "TheStreet.com" TV show. I said that daytrading is nothing more than gambling; Gary disagreed. After my column this morning on the topic, I was besieged with feedback. Here's what readers had to say.
First off, your use of one person who was addicted to trading to prove that trading is gambling is very suspect. Even in your profession, not everyone who practices the discipline does it for the purest of intentions.
Trading may be gambling or it may not be ... personally I am biased and think that Gary has made the best argument. I firmly believe that trading is a discipline with a generous amount of artistry thrown in.
Concerning the odds being in a trader/gambler's favor, I believe that any good investor will tell you the odds don't always have to be in your favor if you keep to the discipline of cutting losses and letting winners run. I have read plenty of studies and analysis of others (and my own experience) that tell me that the majority of gains occur in a minority of trades. My job then is to "stay in the game" as
writes on a vast majority of "unsuccessful" trades so that I can be around to make the profitable trades. Does this sound like gambling to you? If it does, then I will agree with you and continue to do it anyway.
A couple more points that you haven't made yet:
Gambling is the wager on random events. If you have some edge that turns the odds in your favor, that makes those events less random; it becomes less of a gamble. A good counter can't really be said to be gambling if he/she wins most of the time at 21. Similarly, you can't really say that the casino is gambling with its funds every time it risks money at the table -- it's conducting a business.
Unlike purely random events like the roll of the dice, stocks do have "memory" and tend to move based on where they just were. That gives a good daytrader an edge that, over a large number of trades, allows him/her to conduct a profitable business. GBS does exactly the same thing, only he does it over a somewhat longer time period so nobody can accuse him of daytrading. All of his charting is nothing more than interpreting where a stock has been to predict, based on historical patterns, where it's going. GBS proves the point: If you're good at it, it's a business, not gambling.
Now, what many daytraders tend to ignore is how much commissions eat into their edge. Consider a trader with a $50,000 stake who makes 40 trades a day. If each trade costs $25, that's $1,000 per day in commissions. That amounts to the entire stake in two months. If you throw in the buy/sell spread of market orders, you get the idea. Sort of like the house taking its cut, you can't win over the long haul unless you're really good at counting those cards.
Bottom line, if you're good at it, it's a business. For most, it's gambling.
You are 1,000% correct, the discussion is not even close. Investors and owners own ... daytraders provide them with liquidity.
Before expounding as to whether daytraders are gamblers/speculators, you should realize there is a difference between gambling and speculating.
A gamble is a wager on an event that has a zero or negative expected return for the pure thrill of risk.
A speculation is the deployment of capital on an event that has a favorable risk/return advantage (regardless of risk).
Therefore, it is safe to assume that many daytraders are in fact gamblers. Some, however, who are skilled are actually speculators because of their positive expected return.
The most successful businesspeople I know take calculated risks. If we view stock speculating, hedging, trading as a business, then we have to understand the difference between reckless and calculated! Some businesses thrive and some fail.
Business success or failure lies with an individual's choices, talent and life experiences. Education, hard work and discipline can raise the risk/reward odds in one's favor, but being incapable of understanding that there is no freedom without self-discipline leaves some with called margin accounts, a reckless place to be and on the gambler side of your equation. Many speculators are looking to run their own businesses being accountable to only themselves; some people are better managers than others. Should those that need a structured environment to work in be in THIS business, is that reckless or calculating?
You're playing with words. There are "gamblers" who win consistently; example, professional poker players in Las Vegas. There are "investors" who lose consistently (too many to mention).
Point made by Gary B. is that good technique affects the probability.
JJC is right to use words and metaphors that reflect casino games; he's doing so to communicate element of risk when money is "bet" on an uncertain future (although called "investment").
How can anyone take the position that daytrading is anything but gambling? Nobody knows the short-term movements of the market. To speculate on these moves on a daily basis would seem to me to be the definition of gambling. That isn't to say that someone could not become proficient at it and even make a living for a period of time. Of course this period of time would probably have to be a bull market or most daytraders would not survive a year. We'll see how many are left after the current Internet sector continues its implosion. Not many, I will venture.
If a trader consistently makes a profit over a period of years in both bear and bull markets, she's an investor.
I read your column occasionally, and find it helpful now and then. However, I must take issue with your column today (8/4). I'm not going to try to defend all of the people out there daytrading, because clearly there are some who really are gambling and have no idea what they are doing.
I will preface this by saying that I believe "investing" based on technical analysis is just as sound as investing based on fundamental analysis, if you know what you are doing. Clearly technical analysis can yield results that are the same or superior to fundamental buy and hold investing. If you agree with that statement (maybe you don't, in which case you can stop reading right now), then I submit the following. Intraday charts and technicals are no different than interday charts and technicals. Only the time horizon is different. If you look at minute-to-minute charts (or any other time series), you see many of the same patterns you see in day-to-day charts -- support, resistance, breakouts, flags, pennants, triangles, etc. These are tradable patterns on an intraday basis, just as they are on an interday basis. In summary, your statement that daytrading is gambling is an uneducated swipe at something you clearly don't understand.
I agree wholeheartedly that daytrading IS gambling. Your example of the attorney who listens all day to
is perfect. As an investor who began in 1964, stayed away from the market until recently, and just began trading in early 1999, I can confirm that I got the "gambling bug." But, I have only 10% of the portfolio in this mode and can afford to lose all of it.
I'm a longtime reader and full-time trader. I am not a daytrader, but I am a floor trader at the
and I "swing trade" stocks with an average holding time of about a week. I also have several profitable stock holdings that I have owned for years, based on fundamentals.
My take on the ongoing Battle of Semantics is right out of the textbooks: Gambling is an activity where in the long run, the expected outcome is negative, but the "psychic income" from the activity itself is sufficient to entice the player to participate. Speculating is an activity which involves risk of loss, but in the long run, there is a positive expected outcome IF a systematic, disciplined approach is adhered to. (Without a systematic approach, I would argue that you don't know your expected outcome, and then you are gambling.) At a casino, the players are the gamblers, the casino is the speculator. As GBS has said, even
activities could be described as gambling if the term is described as merely "entering a transaction where there is risk of loss, but the outcome is uncertain."
Again, this is all semantics, but I would define investing as activities involving owning equity in an ongoing concern that is deemed to be an attractive, long-term source of profits. Typically this would imply a fundamental approach, but I guess you could throw any longer-term trend-trader in there too...
Anyway, I would find it hard to argue that the vast majority of daytraders are not gamblers, as I'm fairly sure most of them have no defined system or methodology and therefore have no idea what the expected outcome of an average trade is. I know we're all splitting hairs here, but I think that's the difference.
This column's message is long overdue. These dilettante traders are little more than financial whores feeding off one another until they either "crap out" or go blind from watching the screen.
Richard B Comyns
In the beginning I daytraded and it was gambling, although I didn't know it. Went in and got
when it was at 90 and within a few hours I watched it go down to near 70. I had lost over $10k.
That was on a Friday. All weekend I was a basket case. It was on Sunday that I actually went and looked at theglobe.com's Web site to see if there was anything good in it that might soothe my anxiety about losing the money. What I saw made me want to vomit. All night I sat up Sunday until Monday morning, and on the opening bell I sold and took my losses.
That cured me.
Never again will I daytrade in a company that isn't investment-grade. The moves might be tinier, and I may have to hold the stock for one-to-three days before I leave it, but I can sleep at night knowing that I'm an owner of a company's stock that has some merit, some solidity behind it.
My first lesson came quickly and was quite brutal. But I changed the way I daytraded and now see daytrading, at least in my circumstance, as investing.
Maybe daytraders need to be subclassified as minute traders, tick traders, hour traders, etc. This could then constitute gambling.
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
firstname.lastname@example.org. Greenberg also writes a monthly column for Fortune.
Mark Martinez assisted with this feature.