Two of the biggest questions among many beginner forex traders are whether forex trading is addictive and if it’s merely another form of gambling. These are well-founded questions because forex trading can be addictive. It can also resemble gambling for many traders, but that doesn’t mean that it is gambling. So, Is Forex Trading Just Gambling?
Although forex trading involves risk because you’re never certain how things will turn out, gambling is random and comes down to luck, while forex trading isn’t; instead, it’s about the ability to choose trades with the highest probability of maximizing gains and minimizing losses.
For instance, with casino gambling, the house will always have an advantage over you and this significantly reduces your probability of winning in the long term. Conversely, when you gain forex trading knowledge and hone your trading skill, you increase your likelihood of succeeding in the market and you have the edge. In light of this, let’s look at some of the differences between forex trading and gambling.
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Key differences between Forex Trading and Gambling
Several differences exist between gambling and forex trading, but the following are the main ones.
Strategy and skill
There are some cases where strategy and skill are useful in gambling, but most of the time, it’s all about chance and luck. In forex trading, strategy and skill are a must. Without these two, you can’t make logical trading decisions, forcing you to trade on a whim. In other words, without skill and a sound forex trading strategy, you are simply gambling.
The analysis advantage
The risk element may be present in both forex trading and gambling, but with forex trading, you always have some valuable insight at your disposal. You can watch and analyze the market before you open a position and risk your money.
You can even keep your eye on the market and adjust your position as new information becomes available during a trade. Except for a few skill-based gambling games, gambling doesn’t come with any analysis advantage – you just get into the game and hope for the best.
Forex trading and gambling belong to different markets. The global gambling market includes various sectors such as lottery, casinos, and sports betting. The market is valued at nearly $445 billion and it’s expected to reach around $648 billion by 2027.
On the other hand, the forex market has a daily trading volume of over $6 trillion and it boasts of being the world’s biggest and most liquid financial market. Forex trading links traders with brokers and financial institutions that facilitate the forex transactions.
Tips to avoid Trading becoming Gambling
When trading is done wrong, it won’t take much to turn it into gambling. Nonetheless, there are several things you can do to avoid crossing the line between trading and gambling.
Understand the market
It’s best to only trade when you understand how the forex market operates. For example, trading without understanding how to analyze the market for opportunities or with no idea what certain market terms mean will likely cost you a lot of money.
Getting into the market when you don’t know what you are doing is essentially gambling since you will be putting your money on the line based on nothing more than hoping for a good outcome. You can prevent this by getting forex trading education.
Among other things, you should:
- Know the fundamentals of the economies of the currency pair you want to trade.
- Understand the impact of various macroeconomic, social, and geopolitical factors on your trading.
- Learn how to analyze the market whether you want to use technical analysis, fundamental analysis, or both. You also have to know how to analyze market sentiment.
Have a plan and strategy
Trading blindly is a big gamble. Similar to trading education, you need a clear plan and a tested strategy to ensure that your trading is not simply gambling. When backed by some good market analysis, your plan and strategy can give you an edge and increase your chances of succeeding in the market.
Have clear long-term expectations and goals
Gambling is normally about risking it all for the big win, but forex trading is about consistent gains for long-term success. If you’re always looking for big risks so that you can make the biggest gains in the shortest time, you’re more of a gambler, not a trader.
Forex trading is not a get-rich-quick scheme. To avoid turning it into gambling, you need to set realistic goals and expectations based on your risk appetite and trading style. Your goal should be to achieve consistent profits while minimizing the losses in the long run. By thinking of the long game, you avoid over-trading and excessive risk-taking.
Know when to accept your losses and move on
Losing money when trading can bring out a lot of unexpected emotions. Consequently, getting caught up in trying to win back losses is a common problem for many traders.
- Let’s say a trader goes long on the EUR/USD when it’s trading at 1.1745, but the market moves against them and the trade closes at a loss at 1.6286. Instead of accepting the loss, the trader, without any market analysis, opens another position to try and recover the loss and, hopefully, make a profit.
- This time the trader goes short on EUR/USD, but EUR actually starts strengthening against the dollar and so the trader is left with even more losses. The trader’s actions exhibit gambling irrationally, not trading.
One of the best ways to avoid turning trading into gambling is to know when to cut your losses. It’s prudent to create a money and risk management plan that details how much risk you’re willing to bear and how much money you’re willing to lose in every trade.
More importantly, you need to stick to the plan even when you think that you can recoup your losses. This way, you avoid falling into the vicious trap of compounding your losses instead of minimizing them.
As mentioned earlier, besides the question on forex trading and gambling, many traders have questions on forex trading and addiction. Check out this comprehensive answer to the “is forex trading addictive?” question.
Here are some more common questions related to forex trading.
What is the success rate of forex traders?
With this question, we first need to acknowledge that success means different things to different traders and it’s relative to each trader’s goals. For most traders, success is about being consistently profitable over time. For others, it’s about becoming rich.
Having said that, it’s commonly known that 90% to 95% of forex traders fail in the market. This means that the success rate is somewhere between 5% and 10%. The numbers may differ slightly, but the fact is that many traders don’t succeed. Unrealistic goals, a weak strategy, and poor money management are some of the main reasons attributed to this failure.
Losing money on some trades is inevitable in forex trading, but successful traders share some common traits that give them long-term success. These traits include excellent knowledge of the market, good money management rules, discipline, realistic goals, and the ability to refine strategies based on lessons from past trading mistakes.
Can Forex make you rich?
This question doesn’t have an absolute answer. While it’s possible to trade forex profitably, the probability of becoming rich is quite low. The forex market will make for a poor investment choice if your aim is to become rich in a couple of weeks or months so you should not expect overnight success and riches.
Forex trading requires skill, planning, patience, persistence, continuous learning, and risk control. In addition to these characteristics, the amount of capital you start trading with will also determine how long it takes you to build your wealth. This brings us to the next question.
Can I trade forex with $10?
Yes, it’s possible to trade forex with just $10. This article takes you through how you can do that.
Some brokers will even allow you to trade with less than $10, but just because you can do this doesn’t necessarily mean that you should. Your initial investment in the forex market will, to a large extent, determine how much you make.
- Let’s say that you start trading with $10. The general rule is that you should risk between 1% and 2% of your capital per trade and your risk/reward ratio should be at least 1:2. For this example, let’s use a maximum risk per trade of 1% and a 1:2 risk/reward ratio.
- The most you can risk per trade is $0.10 and you can expect to make $0.20 per trade. With an average of 45 trades per month and a 50% win ratio, you can expect to make about $4.50 per month ($0.20 x 45 trades x 50%).
- If, for instance, you had started trading with the same conditions but an initial investment of $100, you would expect to make $45 per month. With an initial investment of $1,000, you would expect to make $450.
This is all hypothetical and doesn’t account for factors such as broker fees but it shows you just how limiting starting with very little capital is.
How much money should I start forex trading with?
It’s often recommended to start with an initial capital outlay that will give you better account growth and flexibility. For instance, $500 will give you higher account growth prospects compared to $10 or even $100. How much money you start with will also depend on your trading style. Generally, if you’re a day trader, you can afford to start with lower capital compared to someone who is a swing trader.
It’s important to have the right expectations. Don’t expect to start trading with $10 and suddenly become a multi-millionaire. With $10, you may even fall into the trap of using excessive leverage to maximize your profits. However, this just means that you have a higher chance of losing the $10 before you make any money in the market.
You need to be strategic about how much you will invest in the market to achieve decent growth while also taking into account the risk involved in the forex market. Expecting to make large profits with a very small investment and nothing in the way of strategy is basically gambling and not so much trading.
In the end, you have to keep in mind that forex trading is not gambling but it can easily become gambling if you get into the market with the wrong approach and mindset.