The Difference Between Day Trading And Gambling

I have often said that day trading is fundamentally different from gambling, or at least successful day trading is. A successful trader controls his risk with a thoughtful and well-tested strategy, not intuition; but a gambler depends on luck. Most types of gambling are pure luck, such as roulette or slot machines. But blackjack is a game in which, with a good system, you can have an edge or at least that’s what I’ve heard. I thought it might be interesting to apply my trading techniques to blackjack to see if I could gain an edge, which means simply developing a strategy that is consistently profitable. If I could do that, perhaps I’ve been wrong about gambling, and maybe it has more in common with trading than I thought. This is the story of my experiment and evidence that I was right all along about the vast difference between gambling and day trading.

I started by approaching blackjack the same way I teach novice day traders to approach the market: systematically. I teach them to learn the rules, find a decent strategy, test that strategy, evaluate the results, and then improve the strategy. With these five steps in mind, I sat down to try my hand at blackjack.

First, I learned the rules as best as I could. Each card has an assigned value, and you win if your cards show more points then the dealer, but less than 21. These are the basic rules, but there are some twists: you can split, double down or even insure a hand. Some casinos allow you to split hands multiple times and doubling down after a split, while others don’t. It’s important to know what you can do and what you can’t do, since it can improve your odds and will definitely impact the strategy you choose.

Second, I identified a promising strategy. The payout in blackjack is simple: if you win, you get the same amount that you risked, unless you have a blackjack, an Ace and a 10 or face card. In this case you win twice as much as you risked. I usually avoid this kind of risk management since, when trading, I am trying to make at least $1.50 for every dollar that I risk. Knowing that the risk-reward ratio in blackjack is typically only 1:1, I had to find a strategy that produced more than a 50% winning percentage. After familiarizing myself with the basic rules and the strategy that the dealer uses (e.g. draw until 17, then stop), I learned that I would only have a winning percentage of 45% if I mimicked the dealer’s strategy. It is impossible to turn a profit in the long run this way. I spent two more hours surfing the internet and learning some more advanced strategies, and I finally found one than gave me a winning percentage of 49.5%. This was still not enough, but I thought that if I applied some other trading techniques like sound money management, I might have the best chance of getting above 50% winnings. With my strategy chosen, it was time to move on to the next stage.

Third, test your strategy. I had three strategies I wanted to test:

1.No strategy at all and just using my intuition. Although it was unlikely, I might find that I’m just an intuitive natural at blackjack.
2.A simple strategy that is easy to memorize.
3.A more complicated strategy that requires the use of a cheat sheet. Although the casinos probably would not allow it, I wanted to see if a more sophisticated strategy would perform much better than a simple strategy. In day trading, I believe in simple strategies, but for objectivity’s sake, I thought I should give this a chance.

I found a blackjack simulator on the internet and played each strategy for approximately 30 minutes. My goal was to make 40 plays so that I could get statistically relevant results. I used $1,000 as starting capital and played a minimum of $10, guessing that these conditions came closest to reality.

Fourth, you should evaluate the results. After 40 plays, the outcomes were as follows:

1.No strategy: 24 losses, 16 wins. Total loss -$120. It turns out that I’m not a natural since I doubled down and split when I shouldn’t have.
2.Simple strategy: 19 losses, 21 wins. Total Profit: $20. I got lucky on the last few hands which let me end on a winning streak.
3.Complex strategy: 20 losses, 20 wins. Total Profit: $20. Over 40 simulated trades the complicated strategy did not seem to produce significantly better results. One further drawback was that it took me much longer to simulate the 40 trades since I constantly searched the cheat sheet for the best next move. The time and energy invested in memorizing this strategy wouldn’t pay off compared to the simpler strategy which had the same results.

Finally, use what you’ve learned to improve your strategy. I asked myself a series of questions to see how I could apply what I’d learned: Would it be possible to improve the simple blackjack strategy? What if I set myself a profit target and walked away? Or should I use Martingale Systems to play a losing streak? Could I just skip a play when I thought the odds were not in my favor, like after a hand with a lot of face cards? I searched the internet for answers to these questions, and it seems that there is a modified Martingale System that has helped several professional players make money in the long run. However, this money management strategy is rather complicated, and many players admitted that they lost count during their plays which resulted in losses. Since I didn’t want to spend days to learn how to make money in blackjack, I decided to skip learning and testing this strategy.

The outcome of all of this was clear: I could play blackjack for an extended period of time and break even. Considering that the casinos offer free drinks while playing, this could be considered a winning situation, since I could play for free drinks. However, watching other players it seems that after only an hour of drinking, they lost the ability to follow any strategy, no matter how simple.

The bottom line of my experiment was that I found no way to play Blackjack with a consistently profitable strategy. That goes against everything I teach and do as a day trader. It also proves that, since I have taught countless people to develop consistently profitable day trading strategies for years, day trading is not gambling. What we do as day traders is look for systems that can guarantee profits, not leave the outcomes to chance. It’s nice to know that, at the least, I can play blackjack without going broke. But it’s even nicer to know that, with day trading, I can always turn a profit.