Is Forex Gambling?
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
- 1 Is Forex gambling?
- 2 What is gambling?
- 3 Why do you trade in forex?
- 4 Why is forex considered gambling in the first place?
- 5 The gambling business
- 6 Why are casinos a profitable business?
- 7 Forex leverage
- 8 Confirmation bias
- 9 Losing money
- 10 Mindset of a trader
- 11 Emotional differences
- 12 Trading and tracking
- 13 Trader v gambler
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.
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.
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.
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.
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.
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.
- 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
- 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