Why Do Some People Mistake Forex for Gambling?

08 July 2020

When strating the trading journey, people will have mixed comment on trading. For some people, trading financial instruments is a great way to make money, while others believe that trading currency pairs is gambling.

Is Forex trading gambling in real life? To answer this question, one has to understand the underlying mechanisms of both activities and then determine whether they are exactly the same or not. In this article, we will focus on the main differing aspects between the two activities: probability.

On the one hand, there is gambling, which is a luck-based activity. Yet while a casino gamer may think that their odds of winning or losing are exactly 50-50, the house is always one step ahead of them by turning the odds to their advantage. We will discuss the probabilities in blackjack and see how the house has an edge over its clients.

On the other hand, there is Forex trading, where traders can, like the house in gambling, flick the odds in their favor. But there is no actual “house” in trading; instead, it is more like a zero-sum game where traders’ conflicting interests are competing with one another to get favorable market conditions for their trades.

There are numerous ways of tweaking the odds in your favor. From using technical analysis with various indicators to creating a trading journal, different strategies. In this process, proper money management is critical.

watch our trading psychology and money management video

Is Forex gambling or finance?

Is Forex trading a gambling activity, or is it a legitimate investing option? Many people ask that question. When people start trading Forex, their goal is to get as many payouts from their trades as possible and turn initial deposits into a massive account balance. While this is a perfectly reasonable, it can easily lead to greed. When traders are chasing money, they lose money. When traders' goal is to trade the right way, they make money.

Motivated by greed, traders tend to take blind chances, instead of calculating their every step. This is the main reason why some people associate gambling and Forex with each other. In gambling, the chance and randomness are the underlying forces of every game, whether it’s slot machines, poker, or blackjack.

However, even in this sense, there is a big difference between gambling and trading Forex and that difference lies in probabilities. In gambling, the house always stays one step ahead of its players and wins in the long run by turning the odds to its advantage. In Forex, however, there is no house; instead, traders are their own “houses” – they can use various techniques to flick the odds in their favor.

Let’s take a look at a more specific example of blackjack odds to better understand it.

Odds in blackjack

One of the most important characteristics of blackjack, as well as any other casino game, is that no matter how professional a player is, the house will always win in the long run. Granted, some people will win big prizes, however, the total losses will eventually equalize those winnings and turn the balance wheel towards the casino. In casino, the more you play, the more you lose.

In gambling, the house always wins, because the gambling house has an edge over its customers. In blackjack, a player has to always act first when the first round of dealing is over. And when they hit a card (demand another card from the dealer) and bust, i.e., the card values go over 21, they lose, even if the house busts as well. It is interesting that a chance of this to happen is about 28%.

Another detail that needs to be mentioned is that every hand value has a specific probability of busting a player. For example, if a player has a hand value of 11 or lower after a starting hand, there is a 0% probability that they will bust. Immediately above the value of 11, this probability increases massively: 12 hand value – 31% chance of busting, 13 hand value – 39% chance of busting… By the value of 20, the probability of busting is 92% and at 21, a player will definitely bust by hitting an extra card.

Now, players can use different techniques like doubling down to increase the payouts, splitting the pair, etc. to reduce the odds that are in favor of the house. But even by doing that, the house will still be in a better position.

Trading Forex isn’t gambling – Here’s why

Unlike gambling, there is no “house” in Forex trading. Your competitor on the market is another trader who has his/her own interests. What's more, not all market participants are interested in making money. The list of Forex market participants include: commercial banks, central banks, retail and institution traders, governments, multinational corporations, etc. Multinational corporations do not focus on losing money when exchanging currencies. They trade currencies out of necessity, as they are operating in multiple countries and need various currencies.

In trading, your biggest adversary is yourself: In order to make money trading, you need to plan a trade and trade a plan. You have to think before you make a decision, and don’t let greed get the better of you. Self-management is highly important for trading profitably.

What differentiates Forex and gambling is that traders aren’t passive participants of the process where they’re intentionally put in a worse position by the market. By using various strategies and tools, traders have the ability to turn the odds to their advantage and get ahead of the market, and grow trading balance.

When talking about Forex vs gambling, it's critical to note that there are many Forex traders that consistently make money. Hedge funds and investment funds are actively participating in the process. You will not see a pension fund that hires professional gamblers to make money gambling. On the contrast, there are many institutional traders working for wealth management companies.

How can a trader turn the odds in their favor?

There are different approaches and techniques in trading that enable people to make more conscious and well-thought-out decisions. Let’s have a look at some of the most popular ones:

One of the most widely-used approaches is to incorporate technical analysis into trading. With this method, traders can further outline Forex and gambling differences by minimizing the randomness of a trade. Technical analysis allows people to observe prior price movements, analyze them, and speculate in which direction the market will move. And there are lots of technical indicators that make this possible;
A trader can also conduct a fundamental analysis with the help of different economic indicators. By using this method, he/she can observe the current state of a company, market, or a country, assess their strength, and determine, whether the price of an asset will increase, decrease, or stay the same;
There are also various risk management strategies that reduce the chances of losing too much and make the portfolio more stable. For example, a trader can diversify their portfolio by using different trading instruments.
Traders can search and develop trading strategies, test and backtest them using trading platforms to see which strategy can give them an edge over other market participants.

Obviously, these aren’t the only strategies that help traders dial the odds in their favor. Besides, even they won’t be able to offer the exact point where the price will go next – they are useful as much as they make speculation a bit more accurate. But more importantly, they enable traders to trade more consciously on Forex, unlike gambling.

Is gambling and Forex the same? — Key takeaways

Is Forex a gambling activity? You will hear that question very often from people that have heard stories of riches to rags and rags to riches. The truth is that it depends on a trader. Some people treat trading as business and get great results, while others approach trading as gambling. Some people think that Forex trading and gambling are similar activities because traders are risking their funds on a certain price movement that might not happen. They're spread betting.

However, is Forex like gambling in real life? There are lots of differences between the two activities, and the most fundamental one is associated with probability. In this article, we looked at the example of blackjack and saw how a casino has an edge over the players. The house understands the odds of winning and losing positions. The more you gamble in a casino, the more you lose. In trading, tables are turned. When trading financial instruments using profitable trading strategies and manage your risks properly, the more you trade, the more money you make.

FAQ on the differences between gambling and Forex

What are the differences between gambling and Forex?

Some people believe that because they’re both dealing with luck and chance, gambling and Forex are somewhat similar activities. However, when examined closely, many fundamental differences start to emerge, where the most important one is probability.

On the one hand, we have gambling, which has two participants: a house and a player. No matter how professional a gambler is, the house is always ahead of them. What this means is that the odds for a losing bet are set higher by the house than the odds for a winning bet. This way, while some gamblers can win big jackpots, the rest will lose and those losses will dial the balance wheel in favor of the casino.

On the other hand, we have Forex trading, where there is no “house” against which a trader must act. Here, traders have to compete with other traders, as well as themselves, and make decisions in a way that they have better chances of getting a payout. In other words, a trader can act as a house in gambling by turning the odds in their favor.

Can a Forex trader increase their chances of success more than a gambler?

Both in gambling and Forex, individual actors can increase their chances of success. However, in gambling unlike Forex, the house will always retain the upper hand over the player. And all the different techniques can only reduce that upper hand, not remove it completely.

In trading, however, people can flick the odds in a way that they hold the advantage. And there are lots of different ways of doing that. The most popular way is to do technical analysis. With technical analysis, traders can analyze prior price movements and have some idea as to where the price will go next. There are many technical indicators that allow them to do that.

There’s also the fundamental analysis, which observes the current situation of a company, market, or a country. With it, traders can evaluate the strength of an asset and speculate, whether it will go up, down, or stay the same.

Another method of maintaining the advantage is risk management, which itself has many elements. One of them is portfolio diversification: traders use different assets at the same time in order to reduce the risk of large losses and keep the account more stable.

Is Forex trading gambling or not

Forex trading is not gambling. However, trading can easily become gambling for individuals that are not managing their risks properly and do not have a profitable trading strategy. Retail Forex trading is like running a business. Professional traders that make money consistently trading Forex never gamble when trading. Every decision is a part of their trading strategy. Strategies are tested and backtested to make sure that probabilities are on traders' side.

Is Forex a gamble?

No. However, traders that are not well-prepared will likely lose money. Forex is a business that needs preparation. When comparing Forex trading vs gambling, gambling houses have an edge, a mathematical advantage which enables them to make money. The more gamblers play, the more money they lose. When it comes to trading professionally, the tables are turned. The more professional traders trade, the more money they make. To trade consistently professionally, it's important to have a trading system that best suits your personality and provides you with an edge. When you have the strategies and techniques in place, mastering human emotions such as greed, fear, hope, etc. becomes the main challenge. Trading also requires an upfront capital. There are many traders that treat trading as gambling, they are not using any strategies, fail to manage risks and overtrade. Forex trading professionally is not gambling, but it can be for certain unprepared individuals.