The debate about whether trading with leverage is really gambling or if it’s simply a high risk strategy used by professionals is an ongoing conversation and I thought I would share my thoughts.
It seems like the world of traders is divided into two groups where one part thinks leverage is an effective way of using borrowed funds to make more money while the the other part is dead sure that leverage trading is a form of gambling.
In this article, I will break down the different aspects that might cause traders to gamble and how professional traders use leverage to their advantage. I’ve also written a list that you can use to detect early signs of gambling.
Key takeaways
- Trading with leverage is not a form of gambling if you approach it professionally with proper strategies, a trading plan, and risk management techniques.
- Margin trading can be turned into a form of gambling if you are only focused on the profits and leave out all other factors such as risk, your finances, and your well-being.
- The main difference between a trader and a gambler is that the trader uses a systematic approach based on repeating patterns while the gambler is purely basing his betting on luck.
Is leverage trading a form of gambling?
Leverage trading is not a form of gambling even though there are many similarities such as the potential for high risk and high reward, their approach is fundamentally different.
The National Library of Medicine conducted a study where they found out that frequent stock market trading reduces profitability among traders who had previously gambled at a casino.
This would suggest that short-term day trading with leverage could be a catalyst for poorer results if the trader showed behavioral addition to gambling-like activities, however, it does not mean that leverage trading in itself is a form of gambling.
Trading the financial markets is a professional activity that requires great preparation, hair-thin execution, and a way of controlling the downside.
Whereas when you gamble, you simply bet on either a color or a number in the hope that your luck will strike.
Trading is also a game for the sharp analyst where historical data is available, economic factors play a big role, and technical analysis is a key part of making informed decisions.
On the other hand, when you are betting or gambling, your only move is to trust that chance will be on your side.
From the eye of an untrained novice, leverage trading and gambling might seem like the same thing when you look at the results which can either be a big win or a big loss.
But beneath the surface, trading is much more complex and dynamic than gambling.
20 early signs that you are gambling instead of trading
Most beginner traders have probably fallen into the trap of trusting chance more than their trading system which most likely resulted in a poor outcome.
It might be difficult to detect this if you are a beginner trader but you must recognize the symptoms of “gambling” while trading.
Here is my list of early signs that you might be gambling when leverage trading:
- Overleveraging: Consistently using the maximum leverage in forex without justification when the market conditions are not favorable.
- Always relying on tips: Blindly using tips from social media or friends as a way to get into trades without doing your own analysis or thinking through the trade beforehand.
- Compulsive trading: Feeling an urge to always be in a trade without a clear entry signal from your trading system.
- Impatience: Having the feeling that you can’t wait to enter the market when watching the charts or reading the news. Always expecting immediate high returns and closing positions prematurely because it didn’t yield immediate profits.
- Chasing losses: Taking more risk or increasing position size after losing trades to recover the previous loss fast.
- Compulsive checking: Monitoring the market movements or your open trades every few minutes and feeling anxious when not sitting in front of the screen.
- Overconfidence: Thinking that you can’t make mistakes and blindly trusting your “instinct” to trade, especially after a streak of profitable trades.
- Trading based on emotions: Entering the market based on fear, greed, excitement, or anger instead of analyzing the market.
- Disregarding past mistakes: Consciously repeating the same mistake over and over again without accepting responsibility for your actions.
- Hoping for a “big win”: Like a gambler waiting for a huge jackpot you are waiting for that massive profit to recover all the previous losses. This is a feeling is a big part of how you structure your trading.
- Borrowing money to trade: Borrowing money from a family member or friend after losing too much money from leverage.
- Overexcitement before trading: Feeling overly excited before the trading session much like a gambler would feel before going to the casino. Feeling extreme emotions with every trade could indicate over-attachment to immediate outcomes.
- Difficulty closing out losing trades: Holding on to losing trades for too long, hoping they will eventually turn around. Praying or doing other small ceremonies to get more luck while in a losing trade.
- Frequently revenge trading: Immediately trying to recover losses with high leverage trading.
- FOMO trading: Having intense anxiety about missing potential profits after seeing the market or hearing a tip. Often leads to impulsive traders without doing research or analysis.
- Trading with debt: Even though you lost more money than you invested you keep trading to try to recover.
- Withdrawal symptoms: You feel restless, anxious, or irritable when not trading. Much like an eager gambler would feel the urge to place another bet.
- Mood swings: You experience an emotional rollercoaster and extreme mood swings on the outcome of a trade. From intense euphoria after a winning trade to complete despair after a loss.
- Desperation to recover losses: Feeling the overwhelming need to immediately recover any loss, leading to poor decision-making much like a problem gambler would double down after a loss.
- Denial: Refusing to accept losses by avoiding checking trading accounts and closed-out trades.
Keep in mind that most of these signs are psychological behaviors rather than beginner mistakes.
You could say that trading without a proper high leverage trading plan or not using stop losses is the same thing as gambling, but no.
Even though gambling traders might be trading without a strategy and skipping out on stop losses, it is very common for beginners to do the same.
Simply because you are skipping out on a few strategic factors as a beginner does not mean you are gambling.
What you should be looking out for are changes in behavior that resemble the same behaviors problem gamblers feel when they are betting.
The main differences between leverage trading and gambling
While leverage products are often regulated financial instruments, many high leverage brokers and crypto exchanges with leverage operate without licenses.
This can cause harm to beginner traders without proper knowledge about the risks associated with leverage trading, especially when practiced like a gambler.
I wanted to share some wisdom of the biggest differences between margin trading and gambling to show the true gap between both of the activities.
Skill
- Trading: Winning at trading requires skill. Even though you can pull off a winning streak based on luck, if you want to succeed in the long run you are going to have to learn the craft. This takes time and is often a tough learning curve. When I started out as a trader, my idol was always Jesse Livermore who was one of the most successful traders of all time. Read his book for inspiration and valuable lessons.
- Gambling: Blackjack and poker are the two standalone forms of gambling where skill can affect the outcome and you need to practice a lot to win at these games. All other forms of gambling require absolutely 0 skill.
Luck
- Trading: Luck is not a factor when it comes to long-term success among investors and traders. Although you can be lucky to sit in front of the screens at the right time to watch a great setup unfold in front of you. The process of actually trading is not based on luck whatsoever.
- Gambling: Luck is the number one factor when it comes to winning at slot machines, baccarat, roulette, bingo, lotteries, and other games. This is why it is impossible to have a long-term positive outcome when gambling. Short-term winning streaks happen sometimes but they are not predictable.
Outcome control
- Trading: Those traders who meticulously use stop-loss and take-profit orders have 100% control over the outcomes. Sometimes the market experiences more volatility and slippage which can change the entry and exit prices but that has a minimal effect on the outcome. Deciding on position size and leverage or using a crypto position size calculator gives traders great control over the outcome.
- Gambling: The only way gamblers can control the outcome when betting is by choosing the bet size. Even though there are ways to stop wheels from spinning, there is no other way to control the outcome, it’s all based on an algorithm when the bet is placed using a machine.
Capital preservation
- Trading: Most strategies such as crypto leverage trading plans focus on capital preservation as the number one priority. It’s often said that traders who focus on not losing will often make the most money because winners take care of themselves.
- Gambling: Most gamblers focus on the winning aspect and either try to win big or win often. Worrying about the money spent often doesn’t concern gamblers who are chasing the wins.
Feedback mechanism
- Trading: Since it’s possible to read the market and get a feeling of where it’s going in the near term, many traders get feedback from charts which can impact their decision-making.
- Gambling: The feedback gamblers get is binary, you either win or lose and nothing is telling you where the next bet is going.
Tools
- Trading: Traders use charts, news feeds, and pre-defined models that worked in the past. These tools are valuable instruments for the trader to predict the most likely outcome of the next trade.
- Gambling: Gamblers use dice, cards, or betting slips as their tools but they are not predictive and are only used to play the game. Changing these “tools” doesn’t make a difference for the gambler.
Purpose
- Trading: Traders are often serious in their approach. It is a profession that can be practiced over many years and long-term success is granted to those who take the game of trading seriously and approach it as a business.
- Gambling: Most gamblers play to make money but many gamblers gamble just for the fun of it. Unless you are a professional card counter in blackjack or playing poker on a professional level, the purpose of gambling is purely for enjoyment.
Predictability
- Trading: Trading is very predictable. When a trader becomes proficient enough and learns his market inside and out, he can start to predict the market by feeling it. Most professional traders look at the market and use their gut to paint a picture of where the market might go next.
- Gambling: The only thing that is predictable in gambling is that over time you will lose money. That is how the house edge is designed. Most gamblers are unaware of what the house edge is and keep hoping for the luck to turn around when in reality the more bets you place the closer you are to ruin.
Professionalism
- Trading: On average, traders have a professional and long-term approach. It is common for beginners to not look at the markets like a business and more like a hobby but with more experience, this starts to turn into a true business.
- Gambling: Few gamblers enter the casino with a professional attitude. Instead, most people who gamble have a short-term outlook. Gambling never turns into a business.
Education
- Trading: The literature on learning how to trade is nearly endless. You can find books, seminars, courses, degrees, certifications, webinars, and even hire coaches dedicated to finance and trading. Education is the number one factor that makes traders go from being a beginner to making real money.
- Gambling: The only gambling education is the rules of the game which often takes no longer than a few minutes to learn. Poker and blackjack offer some educational material on how to count cards and which cards to play.
Longevity
- Trading: Traders are definitely in it for the long game and can engage in the activity for decades improving their skillset and eventually the result.
- Gambling: The money used for gambling is often discretionary income, set aside for entertainment purposes.
Examples of gambling with leverage
An example of a trader who uses leverage in a way that is similar to gambling would be a person who has previous experience in gambling at casinos.
Let’s say that an imaginary trader Jake has heard stories from his friends on how they are making money in the stock market or using margin in spread betting.
With basic knowledge of the markets, he decides to give it a try.
He starts with $1000 in his account and after reading a few online articles and watching a couple of YouTube videos of gurus explaining how to trade, he is now ready to enter the market.
Without using a leverage calculator to select his position size, he starts with 1:50 leverage which gives him a buying power of $50,000.
He is confident that he can predict the market and decides to enter after seeing a sudden price surge in a cryptocurrency.
Without any analysis or understanding of the sudden surge, he decided to jump in.
Hearing how his friends are making money in the crypto market, he is confident that he is going to make a huge profit so he doesn’t bother using a stop-loss to protect his capital.
First, the market goes in his direction(long) but after a while, there is a sudden retracement of the breakout.
He is quickly down to -$250 on his initial stake and decides to hold on to the position and hope for it to turn around.
More down, he is now down -$350.
He is confident it will turn around, the market can’t go down forever.
Another big leg down, -$500.
He cuts the loss in panic.
He starts to realize that he just lost half his stake in one single position and is eager to win it back to escape the feeling of despair.
He doubles down on the next trade, 1:100 leverage, all or nothing.
Without using a liquidation price calculator to know where his liquidation price is, he jumps in.
Another $50,000 lot, this time he is short selling with leverage.
First, the market doesn’t move.
Then, BOOM, a price drop of $250 points.
His account gets liquidated instantly.
This is the reality of many gambler traders who don’t respect the market and don’t spend enough time learning about proper risk management strategies for leverage.
Don’t be like Jake, study first, and start small.
Final thoughts
In this article, you will learn that leverage trading, when approached with knowledge, discipline, and a well-defined strategy is very different from gambling.
While both carry the same inherent risks and the potential for large profits, the underlying principles and motivations differ significantly.
Trading with leverage is a systematic activity that is based on analysis, research, and continuous learning. On the other hand, gambling is largely based on chance and luck.
By understanding the signs of gambling behavior and prioritizing education and risk management, traders are well on their way to speculating profitably in a professional manner.
The story of Jake highlights the importance of preparation and how dangerous leverage can be when put in the wrong hands.
