The Forex trading versus the gambling question is one of the most controversial among profit-minded investors, who are in one way or another familiar with the currency market. Is Forex Trading the same as Gambling? The correct answer to this question may surprise you as it will be gradually and strategically provided in this article.
To give you a productive and non-sentimental answer, we are going to begin by discovering what the two main keywords in this question are—Gambling and Forex Trading. We are also going to drive you through their slight similarities and their major differences.
What Is Gambling?
Gambling according to Wikipedia can be defined as the wagering of something of value on a random event, with the intent of winning another thing of value, where instances of strategy are discounted. (Emphasis should be laid on “the discounted strategy”. We will clarify this as you read on).
In order words, gambling is when you stake something valuable to you, intending to get another valuable entity while knowing that there is a chance of you losing both the wagered and what you are betting on.
So:
What Is Forex Trading?
Forex trading, on the other hand, is the process of buying one currency with another currency, intending to profit from the exchange. Here the Forex trader analyses a currency, waiting for signals or signposts to predict whether the said currency will appreciate or depreciate.
An interesting fact is that despite the use of well-thought-out strategies to make this prediction, the currency trader still knows that there is a probability of being wrong. And that brings us to the slight similarities between these two—Forex trading and Gambling.
The Basic Similarities Between Forex Trading And Gambling
From the definitions above, you would see that some element of luck comes into play in both gambling and Forex trading. It seems like we have been talking amiss as regards gambling. Let us make it more defined.
Perhaps the most common form of gambling is the use of slot machines in casinos. Players just slot coins without any knowledge of the possible outcome of events, all they know is the blind probability of winning huge amounts of money. This attitude is very similar to Forex traders who dabble into positions without prior analysis or trading strategy. And just like the slot machine example, they bet on random events that had not been quantified or gauged.
Besides the behaviors of unserious traders who just choose not to analyze currencies or who choose to trade for excitement, there are also times when the Forex market gets very volatile upon the release of certain news headlines.
A good example of this was the Iranian threat of invasion of Kuwait. Within the short period of this news release, the Kuwaiti dinar went haywire across the Forex market, making any position on this currency almost impossible to speculate.
Do you see that slight similarity? Forex trading is the same as gambling in the sense that they both deal with probabilities and there is that lack of absolute certainty. Well, this also applies to every business investment, and if that is the case, then we are all gamblers to some extent. So no, Forex trading is not betting or gambling per se. And just in case you are still not convinced, below are borderline differences between Forex trading and gambling.
The Difference Between Forex Trading And Gambling
We have successfully shown you the element of betting and luck that exists between both gambling and Forex trading. Now let us proceed to their clear differences, or better put, let us discuss the reasons why knowledgeable folks go as far as making Forex trading a career. These differences are going to be listed below and explained accordingly. They are:
#1. The Overall Profit Potential In Forex As Opposed To Gambling
With a trading volume of about $7 trillion a day, there are no limits to the amount of money that can be made from Forex. This is possible because of the ever-present probability of profiting from the fluctuations in the price of currency pairs.
Now, one may say: “Don’t gamblers make huge profits as well?” Of course they do, you probably haven’t seen the point. A gambler can make one huge profit, but mostly once in a blue moon. And because they neglect proper prior analysis, their wins are normally accompanied by numerous losses.
Unlike gambling, in forex trading, wins occur more frequently.
One way to increase winning potential and reduce the probability of losses is through Fundamental analysis. It includes watching out for news releases like the Nonfarm Payroll or the Empire State Manufacturing Index. These Indexes have a huge effect on the forex market and help traders predict the market’s movements.
An example of a Forex trader who made unbelievable amounts of money for himself using Fundamental analysis is George Soros. He did this not by betting on random currency outcomes, but through feasible strategy and analysis.
#2. Unlike Gambling, Credible Financial Institutions Trade Forex
Here is a plain fact. Financial institutions like central banks, commercial banks, insurance companies, and prop trading firms all participate in the Forex market. Prop trading firms are companies that trade the forex market through experienced Forex traders by providing them with larger capital which they wouldn’t have afforded on their own.
All these institutions listed above are business-oriented and there is no way they would be “betting” on Forex if it were gambling.
Take prop trading firms for example. They fully understand the basics of the currency market, the dos and don’ts, and all whatnot. But having understood that there are hard-learned skills needed to dabble in the market, they choose to search for traders with such skills. They did not choose to just bet or gamble on the movements of currencies.
If Forex trading was the same as gambling, financial institutions like these would not be involved in it, and neither would they be risking their money on Forex.
#3. There are More Money Management Tools In Forex Unlike Gambling
As opposed to gambling, proper Forex trading involves strict money management and risk management policies. These controls are of course incorporated into the trading strategies of a Forex trader, and he crosses the sacred line from trading to betting when they are ignored.
Risks and money management in forex trading involves the use of stop-loss orders and take-profit orders, as well as checking your risk-reward ratio before entering any trade… It even boils down to proper analysis, backtesting, and knowing when to enter or leave trade positions. These are the things that gamblers do not do. They are more inclined to make impulsive and emotional decisions.
And yes, gamblers have their ways of telling when to stake money and when not to. They also have their ways of limiting the losses they make, but “risk management in gambling” has very little effect when compared to forex trading.
Hence Forex trading becomes gambling or betting when the Forex trader refuses to incorporate risk and money management policies into his trading plan.
#4. Forex Trading Is More Of An Analytical Skill Than A Gamble
This is true because, unlike gambling, there are tools that greatly aid a trader’s prediction. These tools are what give forex trading its speculative nature. Real Forex trading is not guesswork. It involves using proven methods and tools. These tools include the following:
- Technical Analysis
- Fundamental Analysis
- and Market Sentiment
The technical analysis tool has shown that it is more probable for a strong trend moving in one direction to continue in that direction.
Fundamental analysis is workable because it has shown that certain economic and political changes alter the movements of currencies in certain ways.
Also, the use of Market Sentiments to trade has shown that exploiting the fears and hopes of a good number of Forex traders on a particular currency and trading in its direction has shown to be profitable.
Do you see the difference? You do not get these types of clues or guidelines when gambling on cards or slot machines in a casino.
#5. Unlike Gambling, Forex trading allows you to own a Casino—Figuratively!
Yes. “In the end, the house always wins”. If you are from Texas, or you watch any of those casino movies, then you would be familiar with this saying. This saying simply means that the casino is a business enterprise and it exists solely to make profits from uninformed gamblers. They do this by setting constricting rules that are only stacked in their favor.
Don’t get this twisted. Players who bet on outcomes in casino houses win at times, but only once in a while. A recent survey showed that casino gamblers lose 85% of their money to the house. So that saying stated above is true.
Now, with Forex trading, you do not need to worry about the unfavorable rules of the house. Why? Because you become the casino as a Forex trader, you get to set your own rules, choose your cards, and you even get to spy on the cards of your opponents to know “when to fold” or when to go “all in”.
By acquiring the necessary skills needed to trade the Forex market, formulating and sticking to strict trading plans, and managing risks properly, you advance from being a mere gambler into running your Casino and therefore making the kind of profits that Casino owners make.
Is Forex Trading Pure Luck?
The plain and simple answer is No, Forex trading is not pure luck. There are some elements of luck involved, but so is everything you do in life. Starting from running a business venture, looking for a job, or even investing in the bond, stock, and other financial markets. Like every one of these activities listed above, the ability to profit from the Foreign exchange market is dependent on knowledge, skill, discipline, and control.
It is not like gambling which is more chaotic and unpredictable. It is workable and profitable as long as you constantly analyze, strategize, and stick to those strategies. With all these in mind, you should also note that there are times in which certain major currencies can get very volatile, especially on economic and political news releases. This shouldn’t be a problem though, as your stop-loss or take-profit orders and your risk management strategies will be there to shield you from losses and maximize profits.
Is Forex Trading A Business?
While some people see the Foreign exchange market as an unworkable or gambling endeavor, it is not completely true. Forex trading is a time-consuming and profitable business venture.
This is because it can bring in consistent profits if approached with the right mindset, strategy, and discipline. Losses will be made from time to time, but knowing that this is faced by every business enterprise and maintaining the right mindset will bring in profits in the end.
Also, when you consider the fact that Forex trading is taxed in some countries, this will tell you how it is perceived by many government organizations. They know it can be as profitable as even the biggest business enterprise, which is why they include it in their income tax laws.
How To Increase Your Chances Of Winning In Forex
Increasing your chances of winning in Forex simply involves getting rid of any gambling mindset by carefully analyzing currency pairs before buying or selling. It also involves learning how to escape the causes of losing streaks. Below are the two major ways successful Forex traders increase their chances of winning in forex
- Through Technical Analysis. Technical analysis as you may have gathered is the use of historical price data and chart patterns to make decisions in the Forex market. It is based on the psychology that Forex traders tend to react to certain market situations in the same way. Whether this is true or not is a matter of opinion. However, it is important to consider that some price data and corresponding market reactions repeat themselves way too often to be regarded as a coincidence. So using technical analysis in your trading strategy can increase your winning probability in Forex.
- Through Fundamental Analysis. Now, this is a less rigid approach, but it doesn’t make Forex trading any less of a skill or any more of a gamble, as many successful Forex traders base their decisions on fundamental analysis.
Fundamental analysis involves trading on political and economic news releases. This includes the changes in interest rates, the rate of inflation of a particular currency, the threat of war between countries, and so on. Using fundamental analysis can significantly increase your chances of winning in forex if applied correctly.
Important Note: experience has shown that combining both technical and fundamental analysis in the right way provides even better-winning results.
How To Use Risk-Reward Ratio In Forex To Your Favour
What is a risk-reward ratio? Risk-reward ratio or RR ratio is a system for measuring the number of dollars you are most likely to win for each dollar you risk. It is a thorough risk management strategy as it involves the use of stop-loss and take-profit orders. To get your risk-reward ratio, you simply use this formula:
(entry point – stop loss) / (take profit – entry point)
According to most experienced Forex traders, the best RR ratio ranges from 1:3 to 1:2 depending on your skill level. This means that for every trade you enter, you should have a maximum loss of 1% of your account and your profit should be three or two times your loss respectively.
It also means that with one win, you can make up for three or two combined losses.
The risk-reward ratio helps to ensure that you are not setting your stop-loss orders at random or trading like a gambler.
Also, the main idea is to ensure that a Forex trader stakes what he can afford to lose, so the right risk-reward ratio can go slightly higher or lower than 1:3
Furthermore, you should understand that, unlike gambling, the major aim of a Forex trader should be to turn out profitable after a series of trades.
Sticking to your chosen risk-reward ratio is a way to avoid gambling trading and a way to make your risk management plan more rigid and hence more profitable. Click this link to gain deeper insight into choosing the best risk-reward ratio for you.
Why Do Some People Still Consider Forex Trading As Gambling?
The reason for this is that there is no 100% win guarantee for a particular trade no matter the strategy you use.
In other words, When you take a position on a currency pair, there is no certainty of a profitable outcome. This is a fact, but it appears to be misleading at first.
This also applies to other forms of investment, be it investing in the stock, bond, future market, or starting up a business you are familiar with. Investors put their money into these ventures not because they are sure of a no-risk profit return, but because having made adequate planning and risk assessment, they found the odds to be in their favor.
So if Forex trading is the same as gambling, it also means that starting up a business you are good at is gambling, or investing in any commodity is gambling.
Frequently Asked Questions About Forex Trading And Gambling
Is Forex Trading Addictive?
Yes. Forex trading can become addictive especially when a trader focuses on making money rather than the actual trading process. Or when a trader decides not to make decisions based on analysis, hence crossing the trading-gambling line. Also, giving in to emotions like greed, rage or revenge can create neurological patterns similar to that of gambling addicts.
Is Forex Trading A Career?
Yes, Forex trading can be chosen as a career. As a beginner, it is good to start with the right trading psychology. Do not place your focus on making money, rather, you should focus on acquiring the necessary skills and knowledge needed to trade the Forex market. The money will come naturally.
Is Forex Trading Really Profitable?
Yes, Forex trading is profitable. It all depends on the attitude of the Forex trader. To profit from Forex, you are better off acquiring the high skill level, knowledge, and discipline it demands. Don’t worry, these basics are not difficult to learn, you can start by developing a strategy and practicing with a demo account.
Is Forex Trading A Sin?
No, Forex trading is not a sin. It only becomes such when you engage with a gambling mindset. In other words, ignoring risk and money management policies, and engaging in any trading habit that may lead to addiction.
Conclusion
The purpose of this whole article has been to explain the popular and controversial question, “Is Forex trading gambling?”. As you have seen, we strategically answered this question by first revising the main words, Forex trading and gambling. Then we progress by pointing out their basic similarities and their bulk differences.
So is Forex trading gambling? The plain answer is no. But it can be if you decide to ignore analysis, strategy, and other practices that make Forex traders successful.
References
Gambling – Wikipedia
Fundamental analysis in Forex – forextraders.com
How to use stop loss and take profit – admiralmarkets.com
How to trade market sentiment in forex – ig.com
Be the casino in the forex market – fullertonmarkets.com
Top risk management strategies in Forex – ig.com
How Forex trades are taxed – Investopedia
Technical analysis – axi.com
Find the best risk-reward ratio – howtotrade.com