You have probably heard horror stories of people losing all their hard-earned money in the financial markets, or even going into debt.

This makes you wonder if you should avoid any form of high risk trading or investing, and just stay away from the financial markets.

But is trading really that risky? Is it similar to gambling in a casino? Is the chance of losing everything really that high?

Or is there a proper way you can do it safely?



In this blog post, I’m going to talk about the risks of trading and investing, and whether it is the same as gambling in the casino.


Similarities of Trading & Gambling

Most people agree that gambling is definitely risky, and is a sure-lose proposition in the long run. And I don’t dispute that.

What about trading then? Is it the same?

At first glance, trading appears to be very similar to gambling, which is why many people tend to lump them together, and deem it to be intrinsically risky, with the high possibility of a huge loss.

However, while there are some similarities, there is actually a major difference between these two activities.

Firstly, for the similarities.

Trading and gambling both involve a certain element of luck and skill, as well as probabilities and uncertainties.

If I had to make an estimate, I would say 80% skill and 20% luck, if you are trading, but 20% skill and 80% luck if you are gambling.

Both present the opportunity to make or lose huge amounts of money in a short period of time, depending on your skill level.

That is why both pursuits require good money management skills and strong psychology.


What is Your Trading Edge?

However, there is one big difference – the mathematical edge.

Whether you are trading or gambling depends on whether you have the edge.

Simply put, this refers to whether probability is on your side.

If you are a professional trader or a professional gambler, and you have the edge, then you will likely be profitable in the long run.

If you have no idea what you are doing when trading or gambling (you do not have the edge), then you will most likely lose in the long run.

In a casino, since most people have no idea what they are doing, and most people are just there to have fun, the casino usually has the edge, and hence it wins most of the time.

So in order for you to beat the casino, or other players in the financial markets, you need to have an edge.

As I covered in my other posts, your trading plan and trading journal should help you develop that edge.


What is Expected Outcome in Trading?

Before I move on, let me explain what this edge is all about.

To do that, we need to bring in the important concept of “expected outcome”.

Without going into the detailed math (which I have covered in another post), the “expected outcome”, or E(X), tells you whether your strategy is profitable in the long run.

If your expected outcome is positive (more than zero), it means that over the long run, your strategy does have the edge, and you will be profitable.

On the other hand, if your expected outcome is negative (less than zero), then it means that over the long-run you will lose money.


How to Calculate Expected Outcome

How then, is this expected outcome calculated?

It depends on 2 main factors, namely:

  • Your hitrate (or winrate)
  • Your reward-to-risk ratio (RRR for short)

Your hitrate is your winning percentage, for example a 70% hitrate means you win 70% of the time, and lose 30% of the time.

Your RRR is the ratio of how much you make when you win, versus how much you lose when you are wrong.

When you combine these 2 components, you can calculate your expected outcome, which will tell you whether you have the edge.

In trading, doing your analysis and taking a calculated risk tilts the probability in your favour, while in gambling, such as in a casino, the odds are always against you.


How Often Do You Need to Win to Be Profitable?

Some people have asked: Is it possible to make money if you only win 40-50% of the time?

The answer is yes.

If you make more money when you win, as compared to your losses when you lose.

For example, if you make 2-3x returns whenever you win, but only lose 1x when you are wrong, and you win 50% of the time, your expected outcome is still positive.

So it really depends on the strategy which you are using.

There are many different types of strategies, with different combination of hitrate and RRR, which can all give a net positive outcome.

For example, you could have a lower hitrate and high RRR, like the one mentioned above, or you could have a higher hitrate and lower RRR.

In a sense, this is a trade-off, but you just need to find the right balance of hitrate and RRR that gives you a positive expected outcome.


How to Beat the Casino

Another important concept is the law of large numbers.

We previously established that if you have the edge, your expected outcome is positive, and you will be profitable in the long-run.

But how do we ensure that you last long enough to take advantage of the long run?

In other words, how do we ensure that you do not blow up your account (lose all your capital) before you are able to utilize that trading edge?

In statistics, the law of large numbers states that the larger your sample size (the number of times you trade or gamble), the closer your outcome will be to the expected outcome.

So, the solution is actually quite simple.

All you need to do is to make sure you spread out your money over many trades. Because the more trades you take, the more likely your results will match the expected outcome (which is positive).

In gambling, since you do not have the edge, your best bet is to actually do the opposite, which is to take a handful of large bets, and quit the moment you’re up, because the longer you play, the more likely you will lose money in the long run.

By doing so, you can take away the edge that casinos have.

On the other hand, if you have the trading edge but you do not manage your money well, then you are taking away the edge that you have.


Can You Follow the Plan?

One other important factor to consider is the psychological and emotional aspect of trading/gambling.

Because money is at stake, many people are unable to make logical decisions or execute their strategy systematically.

If you have a strategy which has an edge, but you execute it differently, then you are either giving up that edge, or worse, changing your strategy into one which has a negative expected outcome.

For example, if you do not fully optimize your winning trades (taking profit too early), or you do not manage your losses well (not cutting losses), then your RRR will change drastically.

This is because your reward will be lower than expected, and your risk will be higher than expected, so your overall RRR will be much worse.

This could be enough to destroy whatever edge you have, and tip your expected outcome from a net positive to a net negative.

It doesn’t make sense to come up with a great strategy and trading plan, and then choose not to follow it due to conflicting emotions.



Are you making decisions or just guessing?

Are you making decisions or just guessing?


Concluding Thoughts

In conclusion, the greatest risk is not trading or gambling, but rather the player.

The risk involved is not dependent on the activity itself, but rather the expertise and experience of the person doing it.

Professional poker players (who are not gamblers) win because they do not play by pure luck (gambling), instead they use a system that gives them an edge over other players in the long run.

The reason why people lose big in trading is because they trade without a method or system which gives them an edge, or even if they do have an edge, they do not take full advantage of the edge, and instead take single large bets instead of many small bets.

This is why position-sizing, capital allocation and risk management are such essential concepts in trading.

Emotions, such as greed and hope, also tends to cloud better judgment even when one should know better, and erodes the trading edge in their strategy.

Most traders tend to see only the upside in their trades, and not the downside, hence they sell quickly once they see a profit, but hold on to losses in hope that these would turn around.

These are the main reason why many traders who have the edge are still unable to grow their accounts.

So if you want to be profitable in trading, just keep in mind these 3 things:

  1. Have a trading plan & strategy which gives you an edge
  2. Spread your capital over a large number of trades
  3. Manage your emotions and execute your trading plan


Now that I have shared the main difference between trading and gambling, do you still think that trading is as risky as gambling?

Let me know in the comments below!

The world of finance and investing is filled with opinions, news, jargon, and sometimes pure nonsense. It is only the people who actually make trades, who will be able to tell the truth from the lies.

After all, an opinion has no consequence. People can quip about what they think is true, if there is no money on the table. However, when you’re trading with your own money, you’re forced to confront the reality of things. I, for one, am no stranger to taking risks, but I only take calculated risks with a high payoff. That is what trading is all about.

Without further ado, here are 3 dangerous myths that could be wrecking havoc on your trading account:


(Reality: Trading with leverage reduces capital required, but risk can be kept the same.)

Let’s tackle the myth first; the media handles the idea of leverage very poorly, because it often sensationalizes the trader who over-leverages and blows everything.

The idea is simple: I have $100, and I leverage so that I can trade $500 or $1000 of stock/forex. I make one bad trade, and I’m wiped out.

This is true for the person without proper risk-management. After all, the temptation of leverage is to dump all your money into one trade, max out the leverage, and hopefully you make 500% on one trade and can call it a day. The truth is, these lucky trades do happen in reality. Eventually, the trader with his newfound wealth (and greed), piles his money into another trade, and loses everything.

Leverage kills the person who abuses it. It’s like fire; it can cook food for people, or it can kill people.


Leverage, in practice, actually keeps you disciplined. In forex trading, maximizing leverage is actually a wise way to start trading. When you leverage, you are actually committing less margin to a trade, and you can get comfortable with trading by committing as little margin as possible. Here’s what I mean:

For example, suppose you have a stop loss of -$10 and a target profit of +$30, and you make a trade of unknown size X.

1:100 leverage – Margin committed for X lots = $102.50 (I’m making this up)

1:500 leverage – Margin committed for X lots = $20.50 (five times smaller)

In the case of higher leverage, you stay comfortable because even though the stop loss is -$10, you see that the margin committed on your account is only $20.50. This allows you to not have to see the wild fluctuations in margin requirement, and keep you trading small and trading often.

There are several benefits to leverage that most people don’t know about.

Also, trading with higher leverage allows you to take multiple positions with little capital. This is great for beginning traders who want to experiment and take multiple trades with a small account. With as little as $500, you can take 3-5 forex positions with leverage, risking anywhere from $5 to $20 or so for each trade. This is a great way to start for aspiring forex traders.


(Reality: You get stopped out because of the market, not because of the broker.)

Many people who have been trading for some time get convinced that the broker wants them to be stopped out of their positions. I’ve heard of this and seen it happen; the trade hits your stop loss, then immediately goes in your favour and flies in the direction you want, and then you beat yourself up and say “I was supposed to make $XYZ on this trade but I got stopped out because of the stupid broker!”

The truth is, the broker has better things to do than to keep hunting the stoploss on your account.

At least, this is for brokers who want to remain in business over the long-term. How do brokers make money? They make money if you keep trading. Why would any broker want you to stop trading? They would actually want you to be profitable, because for every trade you make, they get a small cut from the spread (also known as the bid-ask spread). Essentially, they want you to love trading and trade so much and so often that they get large revenues from spreads.

Why in the world would the broker want to stop you out? The reason why we get stopped out, is because we are bad traders.

Professionals are buying or selling exactly where your stop loss is placed, because they know that the average investor would place their stop loss there.

The solution to not getting stopped out, is to first acknowledge that trading involves some positions getting stopped out. Being right 40-50% of the time is already sufficient for you to be profitable, so don’t be surprised if half your positions get stopped out.

One example is a sideways market. Beginners love to enter on sideways markets because it presents many signals in both directions. However, professionals are buying and selling at the extremes of the sideways markets, causing beginners to get stopped out repeatedly, while professionals make money repeatedly. Remember that there is another trader on the other side who is filling your order; if you are losing money, it is because someone else is taking money from your account, and putting it in their account.

(Reality: Risk is independent on the product, and forex actually requires less capital.)

In a previous blog post, I mentioned this: If you have $500 to invest, it actually makes more sense to trade forex.

In the Forex market, you can ‘get a feel of the game’ by risking a few dollars per trade. By trading the smallest lot size (0.01 lots), you can learn to make a few dollars here, lose a few dollars there, and rack up trading experience and learn to trade ‘live’ without incurring hefty losses. By learning to make many decisions and experiencing all the different conditions of the market, you would become seasoned enough to trade a bigger size, and fine-tune your own trading strategy to become profitable in the long-run.

Many traders discover they have certain characteristics about themselves that hinder success. In trading a ‘live’ account with a small sum of money, they are putting in some skin in the game, and getting used to the ups and downs of their account. The best part about forex is that there are no commission charges, making the ‘tuition’ fees a lot less than trading in stocks.

I’ve spoken about this at length in my previous blog posts. Besides the lower cost of trading forex, you actually lower your risk by getting better at trading. After all, the biggest risk is yourself. If you’ve got skin in the game, made a few hundred trades with real money, and got yourself a strategy that you can rely on, you are actually a lot less a risk to yourself.

24/7 market; choose when you want to trade.

The great thing about Forex is that you can decide when to trade based on your schedule. That helps people who have punishing schedules: trading in the middle of the night, or during lunch, on a daily basis, works out to a trading schedule that accommodates your lifestyle needs.

Stocks have bigger gaps between bars than Forex does.

Furthermore, with regards to stocks, stocks tend to see bigger gaps between days. Here’s what I mean:

forexForex pairs/currency futures tend to have less gaps between bars; bars close and open at roughly the same price. Here, the chart of NZDUSD (daily).

stockMost stocks have gaps between the candlesticks/bars. Notice how there are many ‘holes’ between bars for First Majestic Silver Corp (NYSE).

Gaps make the analysis a little more complex, because you have to take into account the size of the gap along with the actual candlestick printed on the chart. Forex allows you to employ technical analysis more simply, and learn how to read price action without the distraction of having to figure out what the gap means. Of course, this isn’t a problem among more liquid stocks like the SPY, C, MCD, FB and other “famous” counters.


The real risk in trading lies with the trader. The moment you stop improving, stop learning, stop growing, or stop challenging yourself, you’ll start to see your profits suffer. I encourage all of you aspiring traders to seek the truth, and rely less on opinions in your trading journey. After all, you can only find out the truth when you’ve got some money on the table, and actually start to make trades.