Why Do Some People Mistake Forex for Gambling?

22 November 2023

When starting their trading journey, people will have mixed comments 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 bear any significant similarities. In this article, we will focus on the main differing aspects between the two activities, which is probability.

On one hand we have gambling, which is based more so on luck than skill and expertise. However, the degree of reliance on “luck” also varies between gambling activities. For instance, sports betting gives you more room for analysis based on past performances, the caliber of teams and individuals involved, as well as a myriad of other factors, while a casino games like slots, are based purely on fortunate outcomes and give users little to no control over the outcome. A notable example that we will be referring to in this article is the relationship between the house and the player in another popular casino game - blackjack.

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Conversely, we have forex trading, which is less akin to typical gambling and involves the ability of market participants to “guess” the direction of individual financial instruments, as well as the broader market as a whole. This bears less resemblance to gambling when viewed on larger time frames, but other approaches, such as forex day-trading, may seem more closely linked with the rationale of gambling to some outside viewers.

There are numerous ways of increasing the odds in your favor, which include technical analysis tools and indicators, as well as a clearly defined strategy and disciplined money management. Avoiding some common psychological pitfalls, such as overextension and stress, can also increase your odds of making successful trades and turning consistent profits.

Is Forex gambling or finance?

Is Forex trading a gambling activity, or is it a legitimate investing option? Many people ask that question. When a beginner starts trading, their primary objective is to increase their initial account value considerably and make as many profitable trades as possible. While this is perfectly reasonable, it can easily lead to greed and overly speculative approaches to trading. When the ultimate goal of a trader is to get rich, they are less likely to succeed, as opposed to when they have a more level-headed and realistic approach to trading forex or any other financial instrument.

When greed takes over, traders are much more likely to make uncalculated decisions and bit off more than they can chew, which often results in devastating losses, at which point the act of trading becomes more and more like a gambling addiction than a viable financial operation.. In gambling, 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 probability. In gambling, the house always stays one step ahead of its players and wins in the long run by limiting the absolute profit potential of the player to a manageable amount. In Forex, however, there is no house; instead, traders are their own “houses” – they can use various techniques to increase their odds of success

Let’s take a look at a more specific example of blackjack odds to get a better understanding of where the comparisons between forex trading and gambling hit a roadblock.

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 cancel out winnings and turn the balance positively towards the casino. In a typical casino, the more you play, the more you are likely to lose.

In gambling, the house is the ultimate winner, because the gambling house has an edge over its customers, which makes opening a casino a viable business in the first place. 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 goes bust as well. Interestingly, the chance of this happening 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 is nearly guaranteed to 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. However, the house has the upper hand regardless of the measures taken by the player.

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 with their own interests. What's more, not all market participants are interested in making vast profits. The list of Forex market participants include: commercial banks, central banks, retail and institutional traders, governments, multinational corporations, etc. Multinational corporations do not focus on losing money when exchanging currencies. They trade currencies out of necessity, as they operate in multiple countries and need various currencies.

Psychological factors can do a lot of damage to your performance on the forex market. If you do not have a plan that you stick with, there is a high chance that you will lose money. It is essential to have clear expectations and objectives when trading forex to avoid overleveraging and excessive risk-taking. Knowing your risk tolerance is also incredibly helpful.

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 their trading balance.

Another key distinction between forex trading and gambling is institutional activity. For example, a pension fund is unlikely to hire professional poker players to make money, but they certainly employ forex traders to get ahead on the market. Additionally, proprietary trading firms also fund forex traders, while professional gamblers do not have such privileges.

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 minimize the resemblance with gambling 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 fundamental analysis with the help of different economic indicators. By using this method, they can observe the current state of a company, market, or an economy, assess their strengths, and determine whether the price of an asset will increase, decrease, or stay the same;
There are also various risk management strategies that add stability to their portfolios. 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 increase their odds of success, as there is no way of consistently predicting the exact future price points on a chart. However, they still give traders a better chance of achieving success and getting ahead on the market.