InvestorQ : How does trader think differently from a gambler?
Aastha Awasthi made post

How does trader think differently from a gambler?

vidhya Laxmi answered.
3 years ago

Trader never takes a loss, just because it is limited. Hence not even a deep OTM call option if the odds are not favourable. A trader is more interested in the likelihood of profits. The standard argument that buying options is a great idea because your risk is limited to the premium paid is erroneous. That is a typical gambler’s mentality. No loss is acceptable unless it promises returns.

Trader is always obsessed restricting his loss and saving his capital from depreciating beyond a point. Capital preservation is the key. A trader typically focuses on capital preservation. Traders set limits of how much capital they are willing to lose in a particular trade as well as overall. In contrast, a gambler sets his stakes based on the size of the loss. He is willing to take a series of small losses. Gambler is just interested in returns and not so much in risk.

No loss is too small or too large for a trader. They do not come with mental predispositions. A trader always evaluates his trades based on the need to preserve capital and the likelihood of positive returns. For a trader, irrespective of the size of the potential loss, the likely returns must justify the same.

Let us look at outcomes. A gamble has little or no control over the outcome. Be it the slotting machine or throwing a dice, the gambler will have no control over the outcome. A trader always operates with a Plan-B in place. While a trader may not have control over the outcome, he surely retains control of his actions in any event. Control is the key difference. Gambler has no control over the outcomes.

A gambler really does not care about alternatives and the wisdom of losing money. A trader constantly evaluates alternatives. For a trader, money must always flow to the avenue that promises the best risk-adjusted returns. For a hard-boiled trader, riskless money takes precedence over uncertain money.

The game of a gambler is binary. It is 1 or 0; nothing else. A gambler operates in a discrete environment. He either makes money or loses money. A trader operates in the huge gap between these two extremes. For a trader it is not just about making or losing money but about capital preservation, managing risk and earning returns via the path of least resistance. Trader looks at multiple options before taking a decision.