Most of the time, when I tell people what I do for a living, they can’t help but wonder if the Forex trading I do daily is actually some form of gambling. There are, after all, some similarities, since no trader has a crystal ball to predict which way the markets will move. Still, there are many ways in which Forex traders can understand the markets and make educated decisions about their positions. As such, I’d like to suggest that before you “accuse” a Forex trader of gambling, you consider how the trader operates and what his or her long terms goals are.
The similarities between trading and gambling
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.
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.
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.
The differences between trading and gambling
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 professional 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 the 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.
Similarly, 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.
Is trading gambling? It’s up to you.
In the final analysis, the answer to this question is entirely up to you. For many novice traders, trading really is gambling, as they’re placing trades based on gut feelings and not on market analysis. However, as you develop your strategies and skills, there’s no question that Forex trading can become more science than luck, setting it apart from gambling in an important way.
Success for both gamblers and Forex traders relies heavily on self-control. But this similarity doesn’t make gambling entirely akin to Forex trading. Though there are some correlations, a solid currency trader will find himself firmly ensconced in the science of trading, allowing him to build a trading edge that can take him further (in some ways) than gambling ever will.