Many people have found it difficult to draw a clear line between gambling and trading. Forex trading has been mistaken to be some sort of gambling, and this is because there are indeed a few similarities since forex trading is prediction-based. Here, you’ll find out the differences and similarities between both activities, and finally, make a decision on whether or not gambling and trading are the same.
The Similarities Between Gambling and Trading
- The most obvious similarity between trading and gambling is the absence of a guaranteed outcome as to what will happen. In the two cases, participants invest cash into the marketplace and then stay hopeful that they’ll make money rather than incur a loss. In this sense, buying the Australian dollar or betting on the outcome of a football game isn’t going to be exactly different. You either lose or win.
- One thing a forex trader and a professional poker player will agree on is the fact that there is no crystal ball to help predict with surety the outcome of a bet or trade. In both cases, you are staking your hard-earned money with the hope that it will produce more money in return. Both professionals must understand that winning and also losing is part of the game.
- In the world of currency trading, there is also the likely “black swan event” which boasts of its equivalent in the world of gambling. In the money world, a “black swan event” is a huge headline that crosses the wires, and sends the market into a reaction that is very volatile. For instance, a punter could get a headline that a particular country is threatening to take military action against another. Such information will send the money markets into a wild ride quite often. In the world of gambling, a black swan event is supposedly the equivalent of an opponent holding “four aces” at the poker table. It is very rare but possible and disastrous.
- Finally, there is a major similarity between trading and gambling in the psychological grit required for pursuing both. Both forex traders and gamblers must prepare themselves for the best possible ways to deal with losses even if it was a $1 deposit or more.
The Differences Between Gambling and Trading
While some similarities have been mentioned above, it goes without saying that the differences between gambling and trading are many. Firstly, if you are a skilled currency trader, there must be a system of trading that you have adopted over time, and that promises positive outcomes.
- As a professional trader, there is almost no way you won’t have backtested your trading system, know the ins and outs and also understand the possibility of losing money consistently sometimes. When it comes to gambling of any kind, there is more chance and much less science, so you may not have consistent results over time.
- Similarly, a professional trader must understand that there are specific triggers or circumstances that make you put your money into the market. Such a trigger is called your ‘trading edge’. As a professional trader, you will likely not bother trading in any inappropriate circumstances, because you know that is not where you will make your money. In this sense, there is a major distinction between trading and gambling – trading, when done correctly, should boast of some underlying science, while gambling has nothing of such.
- Technical analysis is equally a major contributor to the differences between gambling and trading, as you can have a set of trading systems or indicators overall that offers you a hint as to the right time to make a move. Obviously, it will be a bit different in every game, but overall you know that and not only bet on the random outcome of cards, dice, or even a roulette wheel, and you also do not have much to back up your thesis.
- Finally, one of the most apparent distinctions between amateur gambling and trading is money management. A professional trader will never risk so much of their trading capital on any specific trade, while a random gambler may go “all in” on any bet using PayPal, which is quite reckless.
After considering all the similarities and differences, the answer to the question of whether or not gambling and betting are one and the same thing is entirely up to you. For many new traders, trading is actually gambling, as they will most likely place trades based on gut feelings rather than on market analysis. However, as you develop your skills and strategies, you’ll see that Forex trading can become more of science than luck, making it nothing like gambling in an important way.
At the end of the day, success for both Forex traders and gamblers rely heavily on self-control. However, this doesn’t mean that they are the same or carry the same level of risk. Luck is also an important factor in both situations, but trading is more skill and science-based.