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Forex trading is gambling if you do it in-correctly, but for those who know what they are doing it is not gambling. I read alot of post on forums etc, where people have lost money, its usually down to bad money management, which is probably the most important thing in trading, and then psychology, finally your entry criteria. Forex trading looks like gambling but it is not. It is a real business. In a gambling, we don’t know what we are doing but in business, we understand properly that what we are doing.
I have been in the forex game for a little while n0w and have, largely, experienced success.
This success is not down to luck. It is down to hard work, spending a lot of my time looking at different trading methods and strategies.
I have even created a course that has created strategies and proved to generate long term profits.
And yet, I still get this question so often, now is the time to put it to bed.
Table of Contents
Is Forex gambling?
Now, let me first caveat everything I’m about to say on the subject.
No matter who you ask, there is not one person in the entire world that can say with 100% certainty what the next movement in a market will be.
They can be 90% sure, 95% sure, even 99.999999% sure. But never 100%. No one can this or that will happen in the future as fact. It’s not possible.
If it was, then the whole stock markets would become obsolete and the people who can see what will happen will be multi-billionaires.
There are tools available to get you educated and give you a good idea about what can happen, but nothing that can eliminate all elements of risk.
So, with that out of the way, let’s get into it.
What is gambling?
The definition of gambling, taken from the Oxford dictionary, is the following:
What can we take away from this?
Look at the choice of language that the dictionary uses.
Words like risky are being used.
Now, as we know from being forex traders, there are always risks that come from trading.
When you go tow the local casino and spin the roulette wheel, there is always a risk that you can lose and you require only luck to get the win.
Forex however, can end be coordinated in a way that there can be little to no risk involved.
Why do you trade in forex?
If your answer is because you want to make as much money as you can so you can buy whatever you want, chances are you are a gambler.
Why’s that you ask? In one word: greed.
In a way, your answer makes sense. Who wouldn’t want to make a fortune and be comfortable, right?
In truth, your greed will end up taking your account to the cleaners.
Anything can happen in an instant. If you understand this then you can be consistently profitable. If not then you’ll be wasting your time.
Why is forex considered gambling in the first place?
This is because people who are unfamiliar with trading seem to think that all the movements in the market are completely random and cannot be predicted.
In truth, successful forex trading is actually a business model that is no where near like betting.
In order to be successful, forex traders must have hours and hours of learning and studying under their belts. They will be looking at all the different investing strategies and looking for the best opportunities to get in and out of the markets.
Most importantly, because traders plan for such a long time, they will have a lot of data to come up with new theories on when and how to make a trade, rather than just pure instinct and that they can feel it coming.
Gambling is a game of chance purely built on personal desire to win.
The gambling business
When you gamble, you bet on with the intention of winning a far greater amount of what you originally invest.
If we look at poker nowadays, there is a lot of hype around playing in a style called GTO, which stands for game theory optimal.
Professionals using this model to claim that they play the game using mathematical systems in order to play a hand the best way possible.
Mathematical systems aren’t exclusively used in poker. A common technique in blackjack is card counting in order to try and get an edge over the house.
The point is that gamblers use these systems to exploit weaknesses in systems rather than to use your own strengths to gain an advantage.
This is where trading differs.
Profits that are made from trading are not made from luck alone. Of course there will always be a tiny element of luck but mostly, gains are made from the knowledge of the individual.
Why are casinos a profitable business?
Day after day, week after week, year after year, millions of punters walk in and hope to make a fortune.
Every now and then, someone will come along and win big. That’s the nature of the game.
However, casinos share common knowledge with forex traders: they understand probability.
The games that they make always have the odds in their favour, meaning that it statistically over time, the house will win more than it will lose.
Look at roulette for example. The typical US roulette table has 38 numbers on it. 18 of them are red, 18 and black and here are 2 green numbers.
The best chance you have by making only a single bet is by betting on red or black.
In a best case scenario, you cover 47% of the entire wheel, meaning that the casino still has an extra 3% advantage before it’s even 50/50.
That 3% may not seem like a lot but over a long period of time, the results are staggering and end up making the casino millions of dollars.
People that go to a casino rely on luck.
Traders make sure they have an edge.
Ok, so now let’s dive a little deeper into the trading itself.
Forex leverage
This is actually one of the reasons that commentators use to say that forex is a form gambling.
Many of the platforms that enables trading on the markets (for the record, we recommend eToro) with leverages at levels like 500:1.
The greater the leverage, the greater the risk, therefore makes forex trading no different to gambling.
But remember, the point of using leverage is that you are only required to use a fraction of your bankroll to make larger trades.
It’s easy to explain why this actually is less of a gamble than people realise.
As you will see form our article focused on how to manage your bankroll, we will only be using 2% maximum of our bankroll per trade.
So if our bankroll was $10,000, we would be trading with $200.
If we use the leverage of 500:1 described above, we would trade with $100,000. To those unfamilair with forex, they think that we are trading with $100,000 our own money when in fact we know this is not the case.
If we weren’t using leverage, then to make similar profits, we would need to use 10x our bankroll on ONE trade!
This is highly irresponsible so using leverage decreases risk for making larger profits rather than increasing it as commonly thought.
Confirmation bias
People are quick to seek out information that backs up their theories as opposed to advice or data that would contradict it. This is known as confirmation bias.
Gamblers are often guilty of (I use the term lightly) ‘suffering’ from confirmation bias. They will look for evidence that supports the action they took. This results in them making similar bets as they believe they have found a system.
This often results in a loss, leading them to go back to their excuses
I’m so unlucky, I can’t believe that happened.
Yeah, ok, just like you said the other hundreds of times you made the same mistakes.
Forex trading does not allow for confirmation bias. This is because traders are aware it exists.
It’s common for forex traders to seek contrary advice on trades that they made. Forex traders understand that critical advice from others can help them avoid mistakes.
Just because you collect what you think is evidence and works for one trade does not mean it is gospel.
Forex investors avoid asking questions that confirm their beliefs and look for those that challenge them.
This is big difference between trading vs gambling.
Losing money
When someone loses a bet, it’s largely because the probability of them losing exceeds the probability that they win.
This is not the case from trading.
Traders mostly end up losing on their investments because of errors in their planning.
When a trader loses on a trade because of their errors, they are able to identify what went wrong and have the control to put things right. In fact, what’s more important is that they are personally accountable if the trade does not work.
If a movement bears but the trader predicted a bullish movement, it’s entirely on them they got it incorrect.
The same cannot be said for a gambler.
When they lose, the fault lies with someone else. If we go back to our example of roulette, there are multiple ‘excuses’ why they lost.
The ball that wasn’t spun by the gambler, the ball bounced up higher than usual, and so on and so forth.
The blame will never lie with the gambler because they are hoping to make some gains based entirely on luck.
Mindset of a trader
Mindsets in trading are entirely different to those of gambler, particularly when they lose.
How many times have you or a friend of yours said that they got ‘so unlucky’ or they ‘run so bad’ and that’s the reason why they lost?
Of course, it could never have been anything else. Not on the choices they made in particular situations, not their reasoning or things of this manner.
This sort of mindset belongs with gamblers because they fail to account for the mistakes that they made along the way.
It goes back to the what we described in the last section. Gamblers do not take any accountability.
When they go for the next bet or the next gamble, nothing has changed and when they inevitable lose, the same logic remains.
It wasn’t our fault, we only needed to avoid x card and we would have won $$$$$$$$.
Give me a break. Sure, this may be genuine every now and then but 90% of the time, it was your mistakes.
I think you can tell that these excuses frustrate me. Rant over.
Emotional differences
As you will probably know, one of the main problems that comes with gambling is addiction.
Stop and think about why this is for a moment.
It’s because gamblers let their emotions get the better of them. This leads to them chasing back losses and gambling more than they probably afford.
Gambling more after a loss is often aggressive and even less thought goes into the consequences of them losing.
This is not good.
Forex traders on the other hand know that emotions should be kept away.
You should have specific goals in place before you even enter the trade. If it goes wrong, no problem. You can go back and look for the mistake that was made so you won’t make it again.
By sticking to the plans and having the right bankroll management in place, you will never need to force trades to get the money back.
On the other hand, when trades are successful and you are making gains, your emotions would urge to make bigger trades.
Trading and tracking
Gamblers do not have any sort of plan when they make their plays.
They line up bet after bet without taking into account what each of their previous bets had won or lost.
Well, they know they lose because they chase their losses, leaving them broke.
Forex traders always have a record of each trade that they make.
They will analyse the market and evaluate the profitability of the trades over a given time period.
Each profit or loss making trade is recorded.
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Because they make a note of every trade, they can seek out advice from unrelated parties and, as we discussed earlier, avoid confirmation bias.
They can then act on the best trades possible because they know their theories correct or not.
Trader v gambler
I hope by now you will not be thinking that forex trading is not gambling and is far less risky than you previously thought.
But just in case you aren’t fully convinced yet, let me sum up the traits of a gambler vs the characteristics of a trader.
A gambler:
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- Does not use strategy
- Does not pay attention to risk management
- Profits on luck alone with no advantages
- Chases losses with bigger and more aggressive bets
- Lets their emotions take over
A trader
- Has put time and effort into developing trading strategies
- Has controls in place on each trade to minimise the small risks involved
- Uses an edge to gain advantage
- Has effective bankroll management
- Does not become emotional over winning or losing on a trade
If you haven’t already, check out our free Forex Trading PDF and the most complete guide to beginner forex traders on the market.
Tom is the owner of Elite Forex Trading. A website that provides beginner tips, trainings, reviews and strategies to help newbies get started making money in the forex markets.
Everyone knows that financial trading comes with a high degree of risk, but often Forex trading is picked out as being more risky than other types of financial trading. In fact, if you take a browse around the internet you will find a number of people claiming that Forex trading is nothing more than gambling. In this article, we evaluate why some people think Forex is no more than a form of gambling and what are the reasons behind this.
Forex and Gambling
The Free Online Dictionary, gives three definitions for the term to gamble;
1a. To bet on an uncertain outcome, as of a contest.
1b. To play a game of chance for stakes.
2. To take a risk in the hope of gaining an advantage or a benefit.
3. To engage in reckless or hazardous behavior.
As you can see the activity Forex trading has some overlap with the general conception of gambling. Traders open positions in the hopes of making a profit, but this also comes with the risk of the market moving against them. The direction of the Forex market can also be very hard to predict, with currency pairings often moving counter to general expectations. It could be also said that for the vast majority of retail FX traders, that Forex is both reckless and hazardous. As data seems to suggest that only around 20% of Forex traders actually turn a profit.
Still, many people would be very resistant to the idea that Forex was really just gambling. There seems to be good reasons to resist such a definition of Forex trading.
Firstly, there are a number of Forex traders who are able make consistent returns from trading the FX markets. While this group is relatively small estimated to be between 10-20% of the total FX trading population, this suggests that skilled traders may be able to turn a profit from FX trading. Gambling typically precludes gamblers from being winners in the long run, due to the fact that most games have a built in advantage for the house. For instance, the game of Roulette will see the player go bust eventually though this may take a considerable amount of time. With FX, there are numerous instances where traders have been able to remain consistently profitable over the long-run, which suggests for skilled traders FX is not akin to gambling.
Secondly, when traders enter into a position there are generally rational reasons for doing so. The trader may have used technical analysis or have fundamental reasons for entering into a position. This seems to be another way in which Forex trading differs from gambling. A person playing Roulette simply places bets on his gut feeling, and if we were to discover a FX trader doing the same thing we would likely say he was just gambling. The fact is that successful traders will have rational reasons for opening positions, which will often have some empirical basis.
Why is Forex Seen As Gambling?
If it’s possible to make a legitimate distinction between Forex and gambling, why are there so many people who insist that Forex is simply gambling in disguise? There seems to be a number of reasons why this idea of Forex as a type of gambling has become so common place.
Use of Leverage
Retail brokerages often offer clients huge amounts of leverage. With many brokerages offering leverage of up to 500:1, and in some cases unregulated brokerages have gone even further offering clients the chance to use 2000:1 leverage. Even 500:1 leverage increases risk massively for a trader. A trader making use of 500:1 to one leverage would see the whole value of his account blown by a 0.20% move against him. Of course a 0.20% move in his favour would see him double his money, but any trader using such leverage in the long run is likely to have his account completely wiped out eventually. Such leverage can make Forex trading no more than gambling.
Lack of Knowledge
Forex is often sold as an easy way to make money online, and you will even find some brokerages selling their services in such a way. This has attracted many people who do not have the skills or expertise to try their hands at Forex trading. In general, financial trading is very challenging and this is why those working at hedge funds or other investment vehicles tend to be paid so well. So it is unsurprising that the majority of retail traders with limited knowledge or experience tend to be unsuccessful at trading. So those newbie traders with no finance background or knowledge who simply start opening and closing positions with no real justification are essentially just gambling.
Conclusions
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While the activity Forex and financial trading has some overlaps with the definition of gambling, there are also important differences. However, it would be fair to say that for both those using excessive amounts of leverage and those who are newbies lacking experience, it might be the case that Forex is simply just another form of gambling. The fact that there is a significant minority of successful traders who are able to turn a profit over the long run demonstrates the fact Forex is more than just simple gambling. Forex should be seen as being distinct from Binary Options which certainly can be considered gambling.
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