I recently returned from a week-long trip to Las Vegas to celebrate my wife getting her PhD in Chemical Engineering. In my first ever post on this site, I talked about how much fun gambling can be. But when I buy and sell a stock, I am not looking for fun. I am looking for profit. The problem is that, for a lot of people, the stock market is no more than a legal online casino. Picking stocks based on a tip your golf buddy gives you or a post you read on Facebook is about as effective as picking stocks based on what your fortune cookie tells you. The stock market can be a casino if you treat it as such. If you have “favorite companies,” you are essentially betting on “lucky numbers” unless you have a better reason for liking the companies’ stocks.

This confusion about the difference between trading with a plan and recklessly gambling on the stock market creates a lot of misconceptions about someone that has been as successful as I have in such a short period of time. In fact, two particular reactions really bug me. The first reaction is this: “You made 400% in five years? That’s nothing! I know a guy that bought a stock that made him back 10 times his money in six months! You should talk to him about his system!” I bet I know his system: fortune cookies. Or online message boards, or horoscopes, or, worst of all, “gut feelings.” The point is this: if your buddy really did make a 1000% return in six months, he got lucky. Plain and simple. There’s nothing wrong with getting lucky, of course. I’ve gotten lucky lots of times in my short trading career. Back in 2009, I doubled my money in FITB in a single  two-week trade. I’m not about to tell you I saw that coming… But with good luck inevitably comes bad luck. Ask any gambler. When you gamble, sometimes you get lucky and win, sometimes you get unlucky and lose. At the end of the day, if the odds are even, you wind up just that: even. When you are gambling on the stock market, you actually end up even minus the commission fees.

Any stock that moves 1000% in six months, or even 200% in six months, is extremely volatile. And volatility, like luck, swings both ways. So for every lucky gambler out there there is one unlucky gambler. In Alabama we have a game called cow patty bingo. It’s delightfully sophisticated. A large field is transformed into a grid with chalk or paint so that there are a large number of squares. Each square is numbered, and all the gamblers can buy a square for a given price. Maybe you see where this is going? The cow is let loose in the field, and that’s when the suspense begins! Everyone stands around and hopes for the cow to… make a cow patty on his or her square. The gambler who bought that square, believe it or not, is the big winner!

Gamblers in the stock market are no different than gamblers in cow patty bingo. Your buddy who made 1000% gains in six months was just lucky that the cow happened to be standing over his stock of choice.

The other thing that I hear, often times from people who have been unlucky stock market gamblers, is, “Yeah, you just got lucky! I thought I had it all figured out too, but I ended up losing every dime. You should quit while you’re ahead before you lose it all like I did!” It’s at this point that I turn to my top secret nerdy obsession: math.

When you buy a stock, over time the stock price will move one of two ways: up or down (stop the presses, right?). In that sense, there are two possible outcomes, much like a coin toss (heads or tails.) So on any given coin toss or any given stock pick, there’s really no way to determine if the coin landed on heads (stock went up) because of luck or because I have some talent for flipping coins (picking stocks). However, if you assume a 50/50 success rate (which I would argue is the odds of any random day-trade being successful) is the “average” success rate, have I just been lucky? The good thing about math, as opposed to fortune cookies, is that there is a way to definitively answer questions! In this case, I will be comparing the fact that I profited on 34 out of my first 42 trades over the stretch of four years to the expected 50/50 success rate on short-term trades that one would expect from someone who doesn’t know what they are doing. Using a test called the Binomial Test, I can determine that the chances of me getting 34 of my first 42 trades correct based strictly on luck are… less than one in 1,000.

Who needs a loved one to make you feel special when you have statistical analysis, right?

So the chances that your buddy that made a fortune on one stock simply got lucky are pretty high. Get back to me after his next 20 trades and maybe I’ll be impressed. But I can say definitively that the probability that I got 34 out of 42 short-term trades correct simply because I was lucky is less than 0.01%.

If the market seems like a casino to you, trust me: it is not. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I couldn’t believe how easy it was to make a 400% return in the stock market in five years using only basic principles of psychology and common sense. To read about how I did it, check out my book, Beating Wall Street with Common Sense, and stay tuned to www.tradingcommonsense.com!