If you are thinking about trading forex, maybe someone you know has said to you, “Don’t do that. Trading forex is no different from gambling. You might as well throw your money away at the casino.”
You might be wondering if they are right. Is forex trading a form of gambling? In this post, we are going to provide an in-depth answer to that question. As you will discover, a lot depends on how you define and approach gambling.
How Do We Define Gambling?
To get started in our discussion, let’s take a look at a few different definitions of gambling, and how they apply to forex.
Merriam Webster offers a simple definition of gambling:
“the practice or activity of betting: the practice of risking money or other stakes in a game or bet”
Forex is certainly not a game. But we could say that it is a bet. You are risking money and betting that the market will move a certain way.
Britannica offers a rather more elaborate definition of gambling:
“gambling, the betting or staking of something of value, with consciousness of risk and hope of gain, on the outcome of a game, a contest, or an uncertain event whose result may be determined by chance or accident or have an unexpected result by reason of the bettor’s miscalculation.”
This definition is more comprehensive than the one above, as it takes into account both the element of risk and the goal of profit. It also points out that skill may be involved, considering that part of the risk identified is a potential miscalculation. That is very much in line with Forex.
Perhaps the best definition of gambling is this one from the Encyclopedia of Social Measurement:
“Gambling is the act of wagering or betting money or something of value on an event with an uncertain outcome with the intent to win more money or things of value than was wagered.”
This definition is as thorough as the one before but expressed a bit more elegantly.
So, by these definitions, yes, we can say that forex is a type of gambling.
But we can also say that the following activities are also forms of gambling by these same definitions:
- Investing in the stock market
- Starting a business
- Pretty much anything else with risk and a potential reward
For some reason, however, our society does not tend to refer to stock investments as gambles.
We also do not tend to accuse entrepreneurs of gambling.
So, why do so many people look at forex differently? It probably all comes down to the ways people tend to trade forex.
Ways in Which Forex is Inherently a Gamble
Before we talk about how a trader’s approach is relevant, let’s go over the risks and uncertainties that are inherent to forex.
- You risk being wrong about your trades. A statement you will read a lot from honest people offering signals and systems is “Past performance is not indicative of future results.” No matter how solid a trading method you have, it is always possible you will lose your trade.
- You risk slippage. Sometimes orders are not filled at the expected prices. This is a risk you always take when trading, especially in volatile situations.
- You risk spreads widening. Sometimes spreads widen more than you expect, costing you money.
- You risk your time and effort. As with any other entrepreneurial activity, forex trading involves a large investment of time and hard work. You are pouring in both with no guarantee that you will become a successful trader.
These same basic risks exist if you are trading other types of assets as well. Whether it is forex, CFDs, commodities, stocks, indices, or something else altogether, these are simply the risks of investing.
Forex is Not Like Roulette
Now, all of that said, one thing that is very important to acknowledge is that even though forex involves taking gambles, that does not make it equivalent to casino games of chance.
When you decide to buy or sell a currency pair, it is very different from the decision to bet on red or black on a roulette wheel.
There is no strategy you can use to determine whether red or black is more likely as an outcome in roulette (actually, they are equally likely). The outcome is purely random.
But what happens in the forex market is not purely random. The events of the market are driven by real-world economic and political situations.
You can track those situations and analyze them using fundamental analysis, or you can use technical analysis or price action to detect patterns in how price behaves.
That means that unlike with roulette, you are not facing a coin toss when you decide to enter a trade.
You are taking a calculated risk based on a strategy you have tested. Past performance may not guarantee future outcomes, but it is a basis for giving yourself a good chance at favorable results.
How You Approach Forex Impacts Your Risk
Now, we mentioned earlier that forex’s reputation as “gambling” in some circles may be the result of how specific traders approach it. Let’s explain a little more about what we mean.
We went over the risks that are inherent to forex trading. But there are some risks that are optional.
Here are some unnecessarily risky ways that some traders approach forex:
- Trading with dodgy brokers that might defraud them or become insolvent.
- Trading without a tested strategy.
- Not tracking results, and therefore have no way to ascertain profit or loss.
- Managing money poorly, and thus taking severe risks with position sizing.
- Quitting their day jobs too soon, and risking finding themselves jobless and penniless.
- Thinking they can get perfect results 100% of the time.
- Expecting others to do the hard work.
- Trading emotionally instead of rationally.
By trading forex like this, these traders are taking unnecessary and avoidable gambles.
Tips for Managing Your Risk When Trading Forex
If you want to avoid unnecessary gambles and minimize your risk when trading forex, here is how you do it:
- Use a no deposit bonus when you first start trading in forex.
- Take forex as seriously as you would any business venture. Treat it like a job and not a hobby. In other words, act like a professional, even if you are just starting out.
- Trade with a reputable broker. Pick one that is regulated and has strong financials.
- Choose a reliable strategy to help you take advantage of patterns in the market and make accurate predictions.
- Backtest and demo test to make sure your strategy has the potential to be profitable before you risk real money.
- Use a smart money management plan to control your exposure. Risking a conservative and consistent amount on each of your trades is an ideal approach.
- Track your results in a spreadsheet so you can figure out what is working and what is not.
- If you are losing money and do not know why, take a break from live trading and figure it out.
- Hold off on significant life changes. Do not suddenly quit your day job with the assumption that you will be able to make a living on forex before you burn through your cash. Wait until you are profitable before making any significant decisions.
- Learn how to trade yourself; do not rely solely on signals. That way, if something stops working, you will be able to adapt instead of finding yourself going back to square one.
- Never lose sight of the risks that are inherent in trading. Mitigate them instead of ignoring them.
- Develop your trading psychology, and back off of trading during times when you are allowing your emotions to cloud your good judgment.
So, is forex trading gambling? In a way, yes—you are taking a risk in the hopes of gaining a reward. But how much of a gamble it is really comes down to how you approach it. Forex is not roulette. Trade responsibly and mitigate risk, and you may have a shot at winning reliably enough to make a living.