- Today’s lesson is going to open your eyes and help you decide if you are trading or gambling, so I want you to read the whole thing very closely, three times over if you have to. Forex Trader or Forex Gambler? - You should read today’s lesson even if you don’t think you have a problem with gambling in the markets, because you will surely pick up some useful advice that will work to.
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- Gambling Vs Forex Trading Forex
Everyone knows that financial trading comes with a high degree of risk, but often Forex trading is picked out as being more risky than other types of financial trading. In fact, if you take a browse around the internet you will find a number of people claiming that Forex trading is nothing more than gambling. In this article, we evaluate why some people think Forex is no more than a form of gambling and what are the reasons behind this.
Forex and Gambling
Data compiled on the stock market and on Treasury Bill (three-month U.S. Government bonds) and Treasury Bond (10-year U.S. Treasury bonds) show a similar up-trend, despite periodic declines. Forex trading being a long established industry is regulated to a higher extent, as compared to spread betting. Traditional forex trading is provided by more established brokerages or financial institutions such as banks that provide accounts in multiple currencies. While both gambling and trading are governed by probability, the difference between gambling and trading is a very fine line. However, it plays a huge role in determining a trader’s success in the long term. Simply put, when money is placed on a bet that has a negative expected value, is called gambling. At times, a gambler might get lucky.
The Free Online Dictionary, gives three definitions for the term to gamble;
1a. To bet on an uncertain outcome, as of a contest.
1b. To play a game of chance for stakes.
2. To take a risk in the hope of gaining an advantage or a benefit.
3. To engage in reckless or hazardous behavior.
As you can see the activity Forex trading has some overlap with the general conception of gambling. Traders open positions in the hopes of making a profit, but this also comes with the risk of the market moving against them. The direction of the Forex market can also be very hard to predict, with currency pairings often moving counter to general expectations. It could be also said that for the vast majority of retail FX traders, that Forex is both reckless and hazardous. As data seems to suggest that only around 20% of Forex traders actually turn a profit.
Still, many people would be very resistant to the idea that Forex was really just gambling. There seems to be good reasons to resist such a definition of Forex trading.
Firstly, there are a number of Forex traders who are able make consistent returns from trading the FX markets. While this group is relatively small estimated to be between 10-20% of the total FX trading population, this suggests that skilled traders may be able to turn a profit from FX trading. Gambling typically precludes gamblers from being winners in the long run, due to the fact that most games have a built in advantage for the house. For instance, the game of Roulette will see the player go bust eventually though this may take a considerable amount of time. With FX, there are numerous instances where traders have been able to remain consistently profitable over the long-run, which suggests for skilled traders FX is not akin to gambling.
Secondly, when traders enter into a position there are generally rational reasons for doing so. The trader may have used technical analysis or have fundamental reasons for entering into a position. This seems to be another way in which Forex trading differs from gambling. A person playing Roulette simply places bets on his gut feeling, and if we were to discover a FX trader doing the same thing we would likely say he was just gambling. The fact is that successful traders will have rational reasons for opening positions, which will often have some empirical basis.
Why is Forex Seen As Gambling?
If it’s possible to make a legitimate distinction between Forex and gambling, why are there so many people who insist that Forex is simply gambling in disguise? There seems to be a number of reasons why this idea of Forex as a type of gambling has become so common place.
Use of Leverage
Retail brokerages often offer clients huge amounts of leverage. With many brokerages offering leverage of up to 500:1, and in some cases unregulated brokerages have gone even further offering clients the chance to use 2000:1 leverage. Even 500:1 leverage increases risk massively for a trader. A trader making use of 500:1 to one leverage would see the whole value of his account blown by a 0.20% move against him. Of course a 0.20% move in his favour would see him double his money, but any trader using such leverage in the long run is likely to have his account completely wiped out eventually. Such leverage can make Forex trading no more than gambling.
Lack of Knowledge
Forex is often sold as an easy way to make money online, and you will even find some brokerages selling their services in such a way. This has attracted many people who do not have the skills or expertise to try their hands at Forex trading. In general, financial trading is very challenging and this is why those working at hedge funds or other investment vehicles tend to be paid so well. So it is unsurprising that the majority of retail traders with limited knowledge or experience tend to be unsuccessful at trading. So those newbie traders with no finance background or knowledge who simply start opening and closing positions with no real justification are essentially just gambling.
Conclusions
While the activity Forex and financial trading has some overlaps with the definition of gambling, there are also important differences. However, it would be fair to say that for both those using excessive amounts of leverage and those who are newbies lacking experience, it might be the case that Forex is simply just another form of gambling. The fact that there is a significant minority of successful traders who are able to turn a profit over the long run demonstrates the fact Forex is more than just simple gambling. Forex should be seen as being distinct from Binary Options which certainly can be considered gambling.
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This site is designed to give you the best information when it comes to trading currencies. But although forex trading makes up 60% of my personal income, the other 40% comes from other investing. This includes stocks and shares but also a growing part comes from sports betting, we even have a separate website that talks about this in detail called Ghost Betting Tips.
Sports Betting Vs Forex Trading
When I tell people I have £50,000 across a number of sports betting accounts their first reaction is pure shock. Usually followed by the “How can you risk that much money?” The truth? If you keep correct bankroll management, all investing is easy over the long term. Whether that be stocks and shares, forex, sports or anything else. So today I’m going to run through some of my personal opinions on the pros and cons of forex vs sports. I even have a twitter dedicated to only this.
Gambling Vs Forex Trading Platform
Table of Contents
Forex Trading Pros:
Gambling Vs Forex Trading Strategy
Back testing a strategy is very easy – Luckily we have a crazy amount of data from the currency markets. They have been around for year and it is very easy to get information about previous prices, structure highs, news and everything in-between. As a result if you come up with a trading strategy. It is very easy to see if you would have made a profit if you traded this in the past. This means you can essentially predict the future (by using the results of the past.)
Limits – There are very few limits to trading forex. You simply have to set up a trading account and then get going. There aren’t any limits to the maximum you can make on a trade. If you are following correct forex trading principles then even if you have 100 million in your trading account you should still only be trading 1 million per trade and hence the currencies won’t fluctuate just due to your investment.
Forex Trading Cons:
Tax – You have to pay tax on all your profits. Like a business this means you have to aquire the funds to start
Starting Capital – Probably the biggest issue to trading forex. As the spreads and pip movements are so small you will need a relatively large bankroll to become a profitable trader. Even if you get leverage at 10/1 you will still need a starting capital of £10,000+. This is one of the reasons I’m so against demo trading accounts. But that’s a rant so I won’t get started!
Strategies – Building the perfect trading strategy takes a lot of time. Back testing through previous years also takes a very long time. The issue with the strategy/system element is traders move around and become too aggressive with their trading strategies. When they fail or blow all their bankroll, suddenly its the strategies fault and not the fact you were putting 15% of your bankroll on every trade… Bankroll management is king.
Sports Betting Pros:
No TAX – Wow this is a big one for me. In the UK you don’t pay tax on sports betting winnings. I know in the US and other countries this isn’t the case. But if you are seriously making a lot of money then you might want to consider one of the tax havens, that goes for any investment earnings. Paying less tax is something I have been looking into for years. Originally having a business and paying 20-50% tax on earnings was hard enough. Nowadays with investing its down around 18%. But with sports betting you pay 0% (in the UK at least).
More hands off – It’s a lot less time intensive than forex trading. Sports betting is more geared around value for specific odds. However you calculate that value, whether you have a hunch (not recommended) or do statistical analysis and back-test results based on previous data (recommended). Once a model is created this is very hands off. You can simply bet where you see value and leave the results to play out.
“Inside Information” – In other types of trading inside information is illegal. People go to prison for decades for trading with inside information. It is a crime. BUT when it comes to sports betting, it seems the more you know the better. Why punish someone when all they have done is found out a start player isn’t playing before the bookies adjust their prices? Or that there is going to be a storm in the middle of a football match, making it much more likely that less points are scored and hence the under total points becomes the best play. But the most important element is that individuals “tipsters” (I hate that word) can give you plays in return for cash. Now you have to be incredibly careful with these people! BUT if you follow the most reliable tipsters you can make 500% ROI per year and that’s no exaggeration!
Sports Betting Cons:
Regulation – There are lots of regulations around where you can place bets. For example in the UK I cannot use Pinnacle or a number of other large sportsbooks. In the USA as previously mentioned I believe you have to pay tax on your winnings too and in some states sports betting is straight up illegal, so check the regulations before you get started.
Gambling Vs Forex Trading Platforms
Low Limits & The dreaded “exceeds maximum bet” – Unlike forex trading, when you make a bet/trade you are making it with the bookie itself. This means that as your bankroll grows you are more likely to be flagged as a very good sports trader. This means you are more likely to have limits on how much you can bet per event. This depends on the size of the event. For example the maximum bet on the superbowl is over 1 million for almost all sportsbooks. But the maximum bet for a small soccer game in league 2 would probably only be £500 in most places. Bigger events have higher limits as the lines are more carefully calculated, meaning the bookies have a higher degree of confidence and hence will accept larger bets. If you are with a sportsbook or bookie that says “exceeds maximum bet” for a specific result then it is probably time to move. This means they are on to your smart betting and don’t want you to take any money from them!
Gambling Vs Forex Trading Forex
Conclusion
Personally I love both sports and forex trading. I will never stop one for another and I will be doing them both for years and years to come. But spreading “risk” and having some diversity is great. Back-testing sports betting strategies to see how much you would have made in a season is very similar to back-testing a forex trading strategy to see if your strategy is profitable. My biggest piece of advice would be don’t just rush into any type of trading. Build a strategy. Build your bankroll. Decide your bankroll management strategy. Good luck. Remember to check out our beginner ultimate guide and our free ebook for your forex trading introduction.
Tom is the owner of Elite Forex Trading. A website that provides beginner tips, trainings, reviews and strategies to help newbies get started making money in the forex markets.