6. Is Trading Gambling?...Conclusion

Is Trading Gambling?...How to Differentiate?...Conclusion

We have looked into various comparisons of gambling, trading and running a business in the last two posts. Let us summarized the similarities and differences in the following table: 

Characteristics	Business	Trading	Gambling
Risk taking required.	X	X	X
Uncertain Outcome	X	X	X
New wealth created.		O	O
Success achieved in a short term.		O	O
Outcome totally by chance			O
Outcome affected by economical, political and environmental factors.	X	X
Part of the outcome can be controlled by participant.	X	X
Value Add to the society or the market	X	X
Probability of success increase with knowledge and effective market study and analysis.	X	X
Pits their skills against the market players.	X	X
Can withdraw from the activity anytime.	X	X

Are we able to clearly differentiate gambling and a non-gambling from the comparison seen above? As you can see, there are only two characteristics of trading that are similar to gambling. They are: 

• No new wealth created and 
• Success achieved in a Short term. 

Unfortunately, these are the two reasons why trading is perceived as gambling for most people, which was discussed in my first post on Is Trading a Sin...A view from Michael J. Gutmann.

There are obvious characteristics in gambling that are similar to trading and running a business. In fact, some these  We can see that all three activities requires some level of risk taking and all three do not have a 100% certainty in their outcome.  Just like a lot of things in life which do not have complete certainty in their outcome, we do not claim all these to be gambling if one participates in it. A good example is investment which has a lot of similar characteristics to running a business, like risk taking and uncertain outcome. But very few people will say one is gambling if he invested his savings in stock or bonds, hoping for a return of investment which is higher than putting in a bank to earn interest. Like trading and running a business, he is also participating a some level of risk taking. So, is taking risk gambling? Well, not everyone will agree with this statement. 

Let's take another point in the list above, the amount of time within risk taking activity, to see if this is a good argument to say an activity is gambling or not. Take the example of the chicken seller who who chose just to do his trade only within the business day and do not leave any overnight. Does that makes him more a "gambler" then those who do their business with a longer term view? Is there a big difference between a day-trader and the chicken seller with the way he conducts his business in a short time frame? 

We can go through the same argument over each of the points stated above and you will notice that there is a counter gambling argument for every gambling characteristic. However, in a closer look, I felt that there is a set of key characteristics when combined, can almost always say the activity is gambling if all of the following are present: 

• When risk taking is required and the outcome is uncertain. 
• There are no new wealth created. 
• When the activity does not add value to anyone other then the participant himself. 
• When the outcome of the activity is completely or almost totally by chance. There are a couple of scenarios that this can be met:
• When one continues to participate in the activity without any knowledge of the probability of the outcome that is able to guide him to a reasonable and logical decision whether or not to participate in the activity. Any favorable outcome from it is totally by chance.
• When one continues to participate in an activity knowing that the probability of a favorable outcome is low.  Any favorable outcome from it is totally by chance.

The above four characteristics are always found in an act of gambling whether it is done in the casino or in the trading market or even in running a business. For example, you will notice that both business and trading can both be made into gambling if one chose not to ignore some of the important factors or characteristics stated above. A trader is considered to be gambling if he enters a trade without a thorough analysis to understand the current state or trend of the market. There are traders that make their decision purely based on recommendations from brokers, analyst or even based on the high volume of participation in a particular market, without any knowledge or without any analysis of the stock that he is buying. Any outcome regardless whether it is favorable or unfavorable is totally by chance. There are also traders who did all the necessary analysis and found that the odds is not in their favor but still continues to proceed with the trade hoping they will be "lucky" to get it right. In most cases they will be wrong for they are gambling in the financial trading market. 

Conclusion

The most basic characteristic of gambling is risk taking. But there is a difference between "calculated" risk and "mindless" risk taking. "Risk" is taking a chance and "calculated risk" is taking a chance after considering the probable outcomes. One must factor in the implication of the outcome as well as the probability of such outcomes. Gambling is risking taking without the process of understanding the probable outcome or taking risk knowing the probability of the outcome is unfavorable.

I once read an article from Jason Zweig who writes The Intelligent Investor for Wall Streets Journal. 

He said: “We underestimate the likelihood and severity of common risks and overestimate the likelihood and severity of rare risks. When we feel we are in charge and we understand the consequences, the risks will seem lower than they truly are. When a risk feels out of hands and less comprehensible, it will feel more dangerous than it actually is.”

Life is filled with opportunities for risk taking. Be it in business, at work, trading, or even deciding which destination for your vacation.  The question is whether efforts were made to understand what one is stepping into so as to increase the probability of a favorable outcome. For non-traders who thinks trading is gambling, maybe the lack of knowledge or understanding of financial trading makes you feel that it is more dangerous than it actually is...thus claiming it to be gambling.

Proverbs 2:11...Discretion will protect you, and understanding will guard you.

5. Is Trading Gambling?... Part 2

Is Trading Gambling?...A view based on the legal definition of gambling.

Michael J. Gutmann tried to answer the question by comparing the differences and similarities of trading and gambling. Now, let us look a little deeper into it from a different point of view. We will start from the definition of gambling and see how or how not financial trading fits into gambling. 

Gambling is an activity of betting or wagering of something of value on an event with an uncertain outcome with the primary intent of winning something of value. In another words, to take a risk in the hope of gaining an advantage or a benefit. The legal definition of gambling: "includes any activity when a person pays something of value (consideration) to participate in an event that presents the possibility of winning something of value (prize) whose outcome is determine at least in part by chance". (Rose, 1986). 

In addition to the definition, ProblemGambling.ca, also included the elements of gambling. 

• One needs to realize that by gambling, something valuable is being put at risk.
• The outcome of the act is determine by chance.
• Once a bet is made, it is irreversible. 

From these definitions, the outcome of gambling is uncertain and determined by chance. Regardless of what one does prior to taking the risk, the probability of the outcome is almost 50/50. Nothing or very minimal can be done prior to the action to study the probability of the outcome which is able to help in the decision whether to proceed with the action, except "hoping".  If a fair dice is thrown, the outcome of the number facing up is completely by chance. Likewise, the outcome from the jackpot machine is also totally by chance although many may say that the algorithm in a electronic jackpot machine may has some effect over the outcome. But this is not the correct platform for this discussion. However, like all games, some level of skills is required to increase the probability of winning just like any other games. Comparing it to running a business, say selling shoes; although the outcome is not 100% certain in a long run, but efforts can be done prior to starting the business by studying the probability of success through market study and analysis. Although, there is some element of risk, but there is an higher level of confidence of success through effective decision making. 

Hoping

We can also apply the same argument in financial trading.  One major factor for a trader to make money from the fluctuation of prices is the ability of trader to analyze the market data accurately to enter and exit the market at the correct time. The science of determining the time to enter and exit the market is call Technical Analysis. It makes use of past data and statistics to help traders to study the demand and supply of stocks in the market. It can also determine the price momentum of which indirectly shows the market sentiment of a particular security. Traders can also use fundamental performance data of a company to decide if he or she should invest their money by buying their shares. We call this Fundamental Analysis. Comparing trading with doing business, Technical Analysis and Fundamental Analysis is similar to market analysis, although not completely. What is similar is that market analysis, like technical analysis, is able to help businessman to determine when to enter the market and how the product should be sold as stated in the previous paragraph. 

There is also something in common for financial trading and running a business. Both outcome although uncertain and face the possibility of losing all or part of the money they put into the activity. But both are largely dependent on the market sentiment. The outcome of trading depends on market forces which is driven by the millions of traders, investors and thousands of institutional players participating in the market. Except for a few individuals that have enough resources to manipulate the market, in most cases a single trader may not be able to influence the price movement. As the number of available shares per stock are limited in the market, the key reason for the price to move up or down is demand and supply respectively, like the the prices of chickens explained in the section on "The Role of a Trader".  Unfortunately, the cause of the supply and demand to change can also be caused by greed which drives the market up and fear which drives market down. Very often, greed and fear is triggered by economic, political and environmental factors, which directly affects the supply and demand of securities, bonds, products and services, with the final impact on price. When we compare this with gaming in which all can be used for gambling, the gambler and the number of gamblers is not able to (or at least legally not supposed to) influence the outcome of a fair game. The number of players putting a bet on a specific number in the game of Roulette will not be able to influence the outcome of the winning. The number of people betting on a particular horse in horse racing will not be able to influence the winning horse. Thus, the outcome of gambling in a game does not depend on the number of participants unlike financial trading or running a business. 

Technical Analysis & Fundamental Analysis

The other point to note is gambling is irreversible once a the gambler committed in the game by making his bet. The gambler will only know the outcome after the completion of the game. In another word, the person who took the risk have completely no control or influence over the outcome of the event the moment after the bet is made. Once the token is inserted into the jackpot machine, the gambler must complete the process to decide how much he will get back. When a poker player places his bets on the table, he will not be allowed to withdraw partially of fully from the game until the round of the game ends. Unlike selling shoes, the shoe-maker can at any time in the process of business can stop selling shoes for whatever reasons. Also, unlike financial trading, the trader is able to withdraw from the trade anytime he wants without loosing all his money in that trade. 

Well, I hope there are enough examples from this and the previous section to finally conclude if trading is gambling or not. We will conclude this in the next section. 

Proverbs 10:2-5...
2     Ill-gotten treasures have no lasting value, but righteousness delivers from death. 
3     The Lord does not let the righteous go hungry, but he thwarts the craving of the wicked. 
4     Lazy hands make for poverty, but diligent hands bring wealth. 
5     He who gathers crops in summer is a prudent son, but he who sleeps during harvest is a disgraceful son.

4. Is Trading Gambling?... Part 1

Is Trading Gambling?...A view from Michael J. Gutmann (Futures Magazine)

This topic is one of the most hotly debated issue in trading. However, before we start the discussion, I think it is important to start with a neutral mindset and not be prejudice over any perspective or opinion. Although we may still have a different conclusion or opinion at the end of this discussion, but it is important that we discuss this with an open mind and take effort to understand and hopefully agree with the facts. 

Trading and gambling has many similarities. Both require risk taking. Both is a zero-sum game. Meaning, there is a winner in every looser, it is purely a transfer of wealth from the looser to the winner with no additional wealth created. But is trading totally gambling? Most people who are not directly in the financial trading marketplace would think so.  I once came across an article in the Futures Magazine website posted as a blog by Michael J. Gutmann entitled "Are Trading and Gambling the same?". Gutmann had discussed the topic quite comprehensively, especially on the reason why society has a negative view on trading. 

Gutmann mentioned in his blog that one of the reason why people are skeptical about trading is because the outcome, like gambling is unpredictable. Society generally prefers the shoemaker-type endeavor because it creates something others find valuable. New wealth creation simply means capital gain out from an effort put into an activity that creates value to whoever is willing to pay for that effort. For example a shoe-maker. Trading and gambling are both fundamentally stochastic, that is unpredictable, and because of this they are often viewed negatively. We feel an “honest effort” has more predictability to it. However, most people will have a more positive view on an investor when compared to a trader even when both investor and trader involve in taking risk in the financial market. Gutmann said that this is so because investment enable new wealth creation because it involves delayed gratification – new wealth can be realized after a longer period time either due to appreciation of the stock value (note that depreciation of the value can also happen). There seems to be an inherent respect for a long-term investment that turns out well: The successful investor is considered patient and prescient. On the other hand, trading and gambling have a get-rich-quick aura to them and are often viewed with disdain because of it.

Gutmann went on to discuss the differences between trading and gambling in terms of how each of them executes their trades. From the article, traders may view themselves more technical, even scientific, than gamblers, relying on intricate formulas and algorithms for success. But there are professional gamblers who use probability and statistics to help them increase their chances to win. There are gamblers who have invested equally in their success relative to the sophisticated traders. One obvious different which I see is that traders pits their skills and knowledge against the vast market. Gambling generally pits individual against another individual. 

Although the blog did not end with a very clear conclusion for our question, Gutmann did however said that whether trading and gambling is the same or not, very much depends on the individual involved.  His statement probably sum up my thoughts. However, before we conclude my position on this question, I would like to discuss, in my next section, with a few more points not covered by Gutmann in the second part of this discussion on "Is trading Gambling?". Hopefully, we are able to draw a better conclusion. 

Proverbs 18:2... Fools find no pleasure in understanding but delight in airing their own opinions. 

3. Role of A Trader

Before we address the question if trading a sin, it is important to understand the role of a financial trader. How do they contribute their trades to the world economy? Or how do they affect common people in the streets or the society? Well, it turns out that traders plays a more important role in the financial marketplace then most people thought. But before we step into into the world of financial trading, I thought we should discuss how trading is done where most people would understand, say trading a common stock like chicken. 

Every morning, the chicken seller will buy chicken from the poultry dealer. Depending on the demand and supply of chicken, a willing buyer will purchase chicken from the dealer at an agreed price through a bidding process. The complication comes when the demand and supply of the chicken varies everyday and even during the day. For example, if there is news that there will be a major flood near the chicken farm which will affect the delivery of chickens to the market, this will cause a surge in demand for buyers for they may want to secure the deal even if it means to pay a higher price for the chicken. In cases like this where there is a sudden rise in demand or drop in supply for chicken and there is only one dealer, then the genuine buyer will not be able to get the chicken easily. Even if he can, he will probably not able to get it at a price that he wants as the sole dealer will have full control over how much he want to sell. So, in order to reduce this risk and also to have a fair market, it must increase its liquidity by increasing the number of sources the buyer can buy the chicken from. This will limit the tendency of over-charging by the sole dealer. 

The easiest way to increase liquidity is to allow buyers to also sell to other traders in the market. Some trader will buy the stock and then sell them on the same day at a higher price.  Some will store the chicken to be sold in the later date. Some will place order for future delivery at an agreed price using contracts. Those who sell it on the same day is like Day Traders in the financial trading market, those who keep the chicken and sell them at a later date are the Position Trader. Finally, those place an advance order are like Futures Traders. We will discuss a little more in detail about futures trading in a later section. Thus, in addition to dealers selling chickens, anyone else who wholes the stocks or future contracts are also allowed to trade their stocks or contracts in the marketplace. This will bring about a fairer price in the market and also prevents monopoly in the market, controlled by just a few powerful players in the market. This is also how the trading market came about. 

Of course, other then chickens, traders can trade other commodities like oil, wood, coal, coffee, sugar, and many other commodities. The same process can also be applied in the buying and selling of currencies, company's share for public listed companies, government and company bonds, index futures and any other legal securities that genuine investors wanted to buy for investment. Without traders, long term investors will not be able to buy the stocks at a fair price as the big fund managers or dealers will have a big control over how much he will sell the stocks to the public, likewise for currencies and bonds.  Again, you may also ask what value does financial trading add to the society where people don't invest.  It turns out that liquidity in the financial market affects almost everyone in the public in some way or another. For instance, in order for insurance companies to pay interest or bonus to policy holders, these companies must invest in the financial market. Or anyone in the street who wanted to change the dollar to another currency, he or she will be able to do it fairly in a fair market. 

I hope you are now able to see the role of a financial trader. It is important to understand the role of a trader and how they affect our life both directly like buying a chicken with fair price and indirectly like how your insurance company can pay you your yearly bonus. This is the most fundamental understanding that we need to know and accept before we can address if the question if financial trader has a role in building His kingdom on earth. However, there is still one important doubt that we need to address and that is "If trading is a zero-sum game where one is a winner, there is also a looser, isn't this very similar to gambling?" Yes, the question is valid and so let us discuss about it in the next section of the blog. 

Romans 12:4-8...For just as each of us has one body with many members, and these members do not all have the same function, so in Christ we, though many, form one body, and each member belongs to all the others. We have different gifts, according to the grace given to each of us. If your gift is prophesying, then prophesy in accordance with your faith; if it is serving; then serve; if it is teaching, then teach; if it is to encourage, then give encouragement; if it is giving, then give generously; if it is to lead, do it diligently; if it is to show mercy, do it cheerfully. 

2. Is Trading A Sin?

For a start, let us define the term financial trading. Financial trading is the act of buying and selling securities (stocks, futures, commodities, options, bonds, etc.) with the intent to capture short-term price movements. Unlike investors, traders place emphasis on a short term (a few minutes to a few weeks) dynamics in the marketplace, whilst investors look into a longer term perspective (a few months to a few years). There are two kinds of traders. Day Traders, who enter and exit a position within a day. Day traders do not hold position overnight. There are also Swing Traders (or position trader), who hold a position for one to several days in an effort to profit from the price short term trends. Of course, there are traders that combines day trading and swing trading in their trading strategies. 

Before we attempt to answer the question if God is at work in the financial trading marketplace, we must first address the issue if it is sinful to trade. We must also remember that the discussion at this point is merely about the act of trading and it should not be mixed up with the reason for trading that can lead to sin. We will look into this in the later part of this post. 

So, is financial trading a sin? If we put financial trader in a list all the professions you know and rate them base on the morality value, you would probably find financial traders in the last 25% of the list, with Pastors, doctors or teachers on top of the list.  You may even find it even lower in the list during the 2008 financial crises. So, is it sinful to trade? The perception of trading has always been negative because of the nature of how money is earned. Technically speaking, trading sometimes can be considered as gambling for it is attempting to create capital gain but without creating new wealth. In another words, it is just wealth transfer from a looser to a winner. Like gambling (which we will discuss in the later post), the total new wealth generated between the transaction of the buyer and the seller in the trading market is zero or even negative if we consider brokerage as a cost for the trade. Unlike, say a baker who earns an income through selling the bread that he made, but in the process creates value for the buyer. Thus, new wealth is created. At this point, it looks like a pretty straight forward answer to our question. However, there is much more then just buying & selling of stocks or any financial instruments. 

Therefore, it is important to understand if there is a positive role that a financial trader plays in our economy before we decide if it is a good thing or a bad thing to do. We will look into this with some examples in the next section. 

Romans 14:1-4...Accept the one whose faith is weak, without quarreling over disputable matters. One person's faith allows them to eat anything, but another, whose faith is weak, eats only vegetables. The one who eats everything must not treat with contempt the one who does not, and the one who does not eat everything must not judge the one who does, for God has accepted them. Who are you to judge someone else's servant? To their own master, servants stand or fall. And they will stand, for the Lord is able to make them stand. 

1. Motivation of GiFT (God in Financial Trading) Blog

What value does a financial trader (equities, FOREX, futures, options, commodity, etc..) brings directly in the life of the common people?. This was a mind boggling question I always asked myself before I stepped into the vocation of financial trading. Doctors save life, policemen protect and enforce law and order, teachers educate the learners, engineers design and produce products and infrastructure, etc. The list goes on and on. These are vocations where people are able to see a tangible value and contribution. How about a financial trader? From my experience and conversations with people, I gather that there are always three main negative perceptions by the public that describes financial traders.

1. Greed (it is all about money only)

2. Non-Productive (they do not produce any thing or provide any services that directly add values to people's life)

3. Laziness (people who does not work hard to earn money)

Although most of us in this trade do not agree with these perceptions, but they are real perceptions in the eye of the majority including Christians too. However, being a child of God, I am not too concerned about how the world thinks, but how God thinks. Then I ponder on the following questions...

1. Is there God in financial trading?

2. Does God have a purpose for Christian financial traders?

3. If yes, what are they and how does God want us to join Him in His work in the financial trading marketplace? 

For those who do not believe in God, do you think if there is any good in financial trading other then making a quick buck by taking advantage of price fluctuation? Is wealth the only objective in financial trading? For believer of Christ who trades for their living, have you thought of why God have placed you in the trading marketplace? How can you be "Salt & Light" and be part of the work for the great commission? 

I do not consider myself a successful trader, or someone with vast experience in the Wall Street, nor am I a theologian. But I hope to use this platform for sharing and most importantly able network Christians in the financial trading community to fulfill their divine purpose as a financial trader to glorify God and to extend His Kingdom in the trading marketplace. Hopefully, this platform is also able to reach out to pre-believers who have yet to experience the real love of our creator. 

There is also no intention to make this blog a venue for debate between my belief in Christ and the belief of a non-believers. So, one the key guiding principle of GiFT blog is to have full respect for each other's differences in believe and experiences. Likewise, though my walk with God may be different from other brothers and sisters of Christ, the ultimate and only motive must be to glorify our heavenly Father. 

So let's us journey together to understand and discuss the work of God in the financial trading marketplace.

Matthew 13:31-32...Jesus told them another parable:"The kingdom of heaven is like a mustard seed, which a man took and planted in his field. Though it is the smallest of all seeds, yet when it grows, it is the largest of garden plants and becomes a tree, so that the birds come and perch in its branches: