Is Forex Gambling?
It is true that there is some percentage of a gamble when opening a Forex position.
No expert, no matter how long they have been trading and analyzing the Forex market, can tell you in full certainty what the U.S. Dollar will do today. There are many tools that can be used in order to help you make a more educated decision, but do not be fooled by so called Forex experts when they tell you they have it figured out. In fact, it is simple math. If they have a 3 trillion dollar a day market figured out, why are they not billionaires? If they really knew the key to eliminating the Forex risk, they would not be wasting their time trying to convert you into a Forex trader. Even in their trading, there is a certain element of Forex gambling.
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The Myth of "The Forex Secret"
No one knows “The Forex Secret”. You know why? Because there is no such thing. You can familiarize yourself with all the technical indicators, study fundamental analysis from dusk till dawn, and there still is some sort of a risk when trading Forex. You are still going to be met with a certain factor of Forex gambling.
A gambler, unless he is counting cards or employing some other trickery to try to place the odds in his or her favor, is accepting that the odds are either unknown or slightly in favor of the house. A Forex trader, on the other hand, is almost always trying to use some kind of strategy to put the odds in his or her favor.
The Crucial Difference
A Forex trader never knows whether the trade he or she is making right now is going to be a winner, however, but has some reason to expect that over time a large number of trades will be profitable overall. This is the crucial difference between Forex trading and gambling, except for those rare Forex traders who trade randomly just to amuse themselves, accepting they are gambling.
A very high percentage of Forex traders (about 72% of retail traders as reported by Forex brokers regulated in the European Union) end up losing more than they gain, not because they are gambling, but because they do not know enough about how to wait until the odds have moved in their favor before opening a trade. For this exact reason, it is crucial when first opening up a Forex trading account that you only use money that you can afford to lose. Call it vacation money, designate it for your Forex account, and face the fact that you might lose it.
The Potential Reward
If you are still reading, you know that while there is great risk in Forex, the possible reward is something you cannot ignore. The potential for making money in Forex trading is as close to endless as any market on the globe. While the Forex gambling/Forex trading comparison is not totally baseless, it is inaccurate.
What are the Differences Between Gambling and Forex Trading?
The following is a list of five attributes that differentiate the two industries.
Numbers
Before I get into morals, ethics, legal issues, and legitimacy, let us just focus on the reason anyone gambles or trades Forex: to make money. There is no comparing the amount of money traded daily in the Forex market to that of the gambling arena. In fact, I am not aware of any industry (ok maybe there are a few exceptions) that handles so much money on a daily basis. Depending on who you ask, there are anywhere between 2 and 5 trillion dollars traded daily in the Forex market. I could not find exact statistics about how much money passes through the casinos daily, but I am pretty sure the numbers do not compare.
Players
The Forex market is backed by the biggest and most important financial institutions on the globe. It is true that traders do not trade with the banks, but rather on the retail market, even so, the fact that the market is supported by such organization provides a much higher level of legitimacy than the gambling world. While gambling always faces challenges on the legal front, Forex is as legitimate as any other market, such as stocks or commodities. So, if you are interested in spending your hard-earned money and taking a risk, wouldn’t you be better off putting it where you know the law and morals are on your side?
Tools
While there is a risk factor involved in Forex trading, you are not totally in the dark when opening a position. There are various schools of thought that dedicate much time and resources trying to eliminate as much of that risk as possible. Whether you are a believer in technical analysis, and the famous saying “The trend is your friend” or you trade with your face glued to the Forex news since you think fundamental analysis is the way to go, Forex is not about luck. You can watch and analyze the Forex market for days before opening a trade, as well as keep a close eye on the currency you are looking to buy, and only then, based on your studies, make your move. I am pretty sure such tools do not exist in the gambling world, which leaves you in the hands of luck or fate. Either way I would not want to depend on chance with my hard-earned money. How about you?
Emotions
One of the main issues with gambling, as we all know, is that it causes addiction. If we think about this for a second, we will understand that the reason this is, is because people let their emotions get the best of them. People step into casinos with nothing but their desire to make money. When they do not fulfill this desire, they try again and it is not long before they have lost all their money, which usually leads them to gamble even more, and often more aggressively. This is of course a big problem. In Forex trading, on the other hand, the first rule is to leave emotion out of the equation, and to maintain good trading psychology. Trade objectively and scientifically. Set your trading goals and stick to them. This of course prevents overcompensating with trades, when you have lost money, or letting your greed take over when you are profitable. However, the obvious question is “Is it really possible to leave your emotion out of the picture”? This leads me to my next point, use trading strategies.
Strategies
It is true that a very high percentage of traders end up losing, and if you ask me why this is, I will tell you it is because they trade blindly and with no strategy. This is the biggest mistake a trader can make. Before you trade a penny, you need to make some serious decisions about your trading goals and limits. Once you have made those decisions, you must implement them using your trading platform. Use stop losses to prevent your emotion and your inner voice from telling you to stay in the trade because it has to go up eventually. Use take profit orders to prevent your natural human greed from telling you not to get out now since your currency will continue to increase in value. Stop your losses and take your profits based on trading strategies and not weak human emotions.
Forex and the Gambling Accusation
Let’s look at some of the similarities between Forex trading and gambling. Most obviously, there is no guaranteed outcome as to what’s going to happen. In both cases participants put money into the marketplace, and then hope they’ll make money instead of losing. In this sense, buying the Swiss franc or betting on the outcome of a game isn’t going to be much different. You either win or you lose.
Accepting Uncertainty
A professional poker player and a professional currency trader must accept that there is no way to predict with certainty the outcome of a trade or bet. In both cases you are putting your money at risk with the hope that it is going to produce more in return. Both professionals should understand that losing is part of the game.
Black Swan Events and Psychological Grit
There is also the possible “black swan event” in the world of currency trading that has its equivalent in the gambling world. In the financial world, a “black swan event” is a major headline that crosses the wires, sending the market into a very volatile reaction. For example, you could get a headline that one country is threatening military action against another. That will send the currency markets into a wild ride quite often. One example would have been when Iraq invaded Kuwait. It not only affected the currency markets, but it also affected the crude oil market as one would expect. In the gambling world, a black swan event would be the equivalent of your opponent having “four aces” at the poker table, something that can happen but is very rare and will cause a lot of trouble.
Finally, a major similarity between gambling and trading is the psychological grit required for both pursuits. Both gamblers and Forex traders must prepare themselves for how to deal with losses, how to not overreact to losses and how to not over-trade or over-gamble in order to make up for losses.
What are the Differences between Gambling and Forex Trading?
It should go without saying that there are many differences between trading and gambling. For starters, if you are a proficient currency trader you will have a system for trading that has a positive expectancy over the long run. As a serious trader, you should have back tested your trading system, you’ll know the ins and outs and you’ll understand that there may be times when you lose money consistently, but over time you should come out ahead. When it comes to gambling, there is much less science and more chance, so your results over time may not be as consistent.
Trading Forex Isn’t Gambling – Here’s Why
If you are a professional trader, you understand that there are specific circumstances or triggers that make you put money into the market. This is called your ‘trading edge’. As a professional trader you likely don’t bother trading in inappropriate circumstances because you understand that isn’t where you’re going to make your money. In this sense, there is a major distinction between trading and gambling – trading, when done properly, should have some science behind it, while gambling does not.
Technical analysis is also a major contributor to the differences between trading and gambling, as you can have a set of indicators or a trading system overall that gives you a hint as to when the conditions might be correct. Obviously, it will be a bit different in each game, but overall you are and not only betting on the random result of dice, cards, or perhaps a roulette wheel, furthermore you don’t have much to back up your thesis, certainly not as much as you would on a financial chart.
Lastly, one of the biggest distinctions between trading and amateur gambling is money management. A professional trader won’t risk too much of their trading capital on any particular trade, while an amateur gambler may go “all in” on a bed, which of course is reckless.
How Can a Trader Turn the Odds in Their Favor?
A trader can turn the odds in their favor by only entering a new trade when the odds are in favor of the trade. Professional poker players do the same thing.
The real question is, how can a trader recognize when the odds are in favor of a trade? Traders can use any or all of three methods to do this:
- Technical analysis – when the price of something is in a strong trend, it is more likely to keep moving in the direction of the trend than to reverse against the trend. Support and resistance levels can also act to make it more likely that the price will move more in one direction than in the other over the short term. Finally, when the price compresses into a relatively small range, it is likely to make a strong directional breakout when it finally leaves the range.
- Fundamental analysis – when economic data and central bank policies suggest that an asset is likely to strengthen, and another one weakens.
- Market sentiment – when a market is dominated by fear or hope regarding certain assets, this sentiment can be exploited by trading in its direction, as long as it lasts.
Why Do Some Still Consider Trading a Gamble?
Even when presented with the ways traders can move the odds in their favor, some people still consider it to be gambling. This is usually because such people do not understand what investing and gambling truly are, because their thinking has been conditioned not to accept the real answers.
For example, let’s say that someone says that trading is gambling because a lot of people lose money, and because the outcome of every trade is uncertain. If you then point out in response that the same can be said about investing in blue-chip stocks, you usually will not get an intelligent reply. People have been conditioned to think of “safe” investments for retirement with low risk, and they cling to this thinking because accepting that their retirement nest egg could go up in smoke is too painful to contemplate.
In fairness, however, it should be said that Forex traders have a higher rate of loss overall than long-term investors in the stock market. Yet the point remains that even conservative stock investors can and do lose, and the outcome of their investment remains uncertain in every case.
Bottom Line
It is true that most retail Forex traders lose money over time. However, there is a significant minority that makes money over time. There are no gamblers that make money in the long run, except for professional poker players. These are not really gamblers because they count cards and use money management strategies based on mathematical models, the same way professional Forex traders do. There are professional Forex traders who make money every year over years and years, but no professional slot machine players who can do the same.
The key to avoiding becoming a Forex gambler is to study various trading strategies, back test them over many years of historical price data and learn what works and what does not – and try to understand why.
