I often receive the question, “Is stock trading gambling?”
And the answer depends on two things, how you select a stock that you want to invest in, and how you manage the trade.
So let’s get started! Is stock trading gambling?
Here’s how to select a stock:
Let’s talk about the first one. Picking a stock.
Many people pick a stock based on a hot stock tip that they get from a friend, or from a website that might be a marijuana stock or a biotech stock.
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Then, when you get the hot stock tip that there’s something about to happen, you can decide to jump on it and know you are in the clear.
Here’s an example.
I googled “hot stock tip.” The first result showed, “17 out of 19 stocks rose.”
I clicked on the website. MJNA stands for Marijuana. Everyone’s crazy about Marijuana stocks these days.
If you watch the video above, you’ll see that when I did this it showed Marijuana rose from nine cents to forty-seven cents that is, 432% gains.
Then I went to finance.yahoo.com and entered the symbol MJNA, Medical Marijuana Inc. What can possibly go wrong?
The chart showed that it has been trading at 10 cents for the past two years.
The “hot stock tip” said it went from nine cents to forty-seven cents and I don’t see that at all.
Is this how you pick stocks?
If you pick a stock like this, stock trading is gambling.
I’m using a scientific approach. I am using indicators.
If you’ve asked yourself “Is stock trading gambling?” and you’re relying on the hot stock tip, then you’re probably gambling.
The second important factor when deciding is stock trading gambling or not depends on how you manage the trade.
And what do I mean by this? When managing the trades, there are two things that you need to keep in mind.
Here’s how I pick a stock:
- When to exit the trade with a loss (because losses happen when trading)
- When to exit the trade with the profit
Here is my rule of thumb, I never risk more than 2% of my trading account on any given trade.
What does this mean? Well, let’s say you have a $10,000 account. If you’re entering a trade you will risk two percent of $10,000 which is $200.
It’s not a big deal to lose $200. Right? You still have $9,800 left. So this means that you still have enough money to enter the next trade.
But what do most people do? They don’t set a stop loss and let the trade go down. THAT to me is GAMBLING.
The other way to manage the trade is with the profit target. You want to take profits while they’re there.
Here’s the golden rule I like to use:
For every dollar that I risk: I want to make $2.
For every $100, I want to make $200. Like our example earlier, for every $200 that I risk, I want to make $400 dollars.
The beautiful thing is if you follow this principle and you apply the Golden Rule, you’ll make money even if you are wrong half of the time.
Hard to believe? Let me prove it to you.
Let’s say you are risking 2% of your account on any given trade. If you have a $10,000 account it would be $200.
You will also apply the golden rule that when you risk $200 you’re trying to make $400 dollars. Making sense?
Let’s say that you’re placing 10 trades and half of these trades are losing trades. What does that mean? Five trades would be all losing trades.
On these five trades, you would lose $200 each which means that you would lose $1000.
Now the other five trades are winning trades, and let’s say on those you make $400 each because that’s our profit target.
So 5 multiplied by $400 is $2,000.
So, how much money do you have after ten trades?
Right! It’s $1000! And half of your trades were losing trades.
Can you see how this is a scientific way to approach the market?
If you risk less on your losing trades than you make on your winning trades, this is how you can succeed in trading.
And again, losses are part of our business as traders and we want to make sure that you limit your losses.
Make sure that you take profits while they are there because these days, profits can disappear quickly.
Have you ever experienced that you had a winning trade and then it turned into a losing trade? This is how you prevent that!
In summary, is stock trading gambling?
“Is stock trading gambling?” all depends on how you approach it.
It is gambling if you are relying on a “hot stock tip” from a website or a friend of a friend or however you get your “hot stock tips.”
Secondly, it is gambling if you don’t limit your losses and if you do not know when to take profits.
However, if you have a proven way to pick stocks and a proven way to exit a trade, by keeping your losses small and taking profits while they’re there…
…then stock trading is no longer gambling because then you have a PLAN.
You have a trading system and when you follow it, the chances of making money in the market are much higher than relying on the “hot stock tip.”
Comment below if you found this article on is stock trading gambling helpful.
And be sure to check out this other great post: Is Day Trading Profitable?
Also, if you’d like to learn how I trade, visit www.mytradingroutine.com now for a free 35-minute training video I’ve created for you.
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