Those who are unfamiliar with Forex trading sometimes liken it to gambling. This comparison to gambling is a controversial topic amongst traders; some agree that it is gambling while others vehemently disagree. When you get to the root of the matter, it comes down to semantics.
Gambling is the staking of something of value on an outcome determined by skill, probability, or chance with a hope of gain and a risk of loss. Speculation on the Forex market is the exchange of one currency for another; speculators do this in hopes of exchanging them again at a more profitable rate.
Using these basic definitions, Forex trading is gambling. Still, others insist it is not. In this article, you’ll learn more about Forex Trading, including why some traders argue that it is not gambling, when it isn’t gambling, and what can affect the market fluctuations.
Comparing Forex Trading to Gambling
More often than not, when debating that Forex trading is not gambling, it is argued that trading is only gambling if the trader treats it like gambling and doesn’t apply any discipline or strategy. They argue that a professional trader is not gambling because they exercise discipline and strategy to minimize losses.
This argument relies on two preconceived notions:
- Gambling inherently lacks discipline and strategy
- Gambling is a narrowly defined activity
While it is true that luck is the ultimate deciding factor in any game of chance, an element of skill, an understanding of probabilities, and practicing discipline can help a gambler to win more than they lose. (This is where the similarity to Forex trading comes in.)
The act of gambling was defined easily enough before as staking something of value on an outcome determined by skill, probability, or chance with a chance to win or lose something of value. However, gambling is a broad term covering many different games of chance, from the complicated game of Craps to the simple toss of a coin.
The following chart compares various aspects of Forex trading and gambling:
|Information-based Decision Making: Technical analysis is available for speculators to assess trends to make educated decisions before making a trade.||Information-based Decision Making: A successful gambler knows the odds of every game they play.|
|The probability of winning on the Forex Market is approximately 50%, with a slightly better probability if the trader is following market trends. (Source: Investopedia.com)||When gambling in a casino, the probability of winning varies by the game, but the odds are always stacked so that statistically, you will lose more than you win. When sports betting, a gambler has to collect on 52.4% of bets to break even.|
|Speculation on the Forex Market is a legal enterprise.||Gambling laws vary depending on location. Some states even outlaw social gambling, such as private poker games held within a home.|
|Successful traders tend to set goals and spending limits before trading to prevent emotional decision-making.||Successful gamblers tend to manage a bankroll, which is the money available to play with. This is a spending limit put in place to avoid emotional decision-making.|
|A losing or winning streak can cause high emotions, leading to less rational decision making.||A losing or winning streak can cause high emotions, leading to less rational decision making.|
|It is advised that you should only trade with money you are comfortable with losing.||It is advised that you should only gamble money you are comfortable with losing.|
|Forex trading can be addictive||Gambling can be addictive.|
Whether Forex Trading is gambling comes down to a matter of semantics. Technically, a trader is placing a wager that the value of a given currency will rise or fall in their favor, and the outcome is ultimately a matter of chance (i.e., gambling). However, from a legal standpoint, Forex is not considered gambling and is not regulated in the same ways that gambling is regulated.
(Sources: The Four Hour Work Day, The Daily Forex; Unwinnable; OnlineGambling; The Sports Geek; LetsGambleUSA; Nasdaq; GamblingSites, BitterEmpire; Louisiana State University Law Center; ForexBoat)
Is Forex Trading More Legitimate Than Gambling?
The fact that the Forex market is backed by the largest financial institutions in the world is one argument that many use to claim that Forex trading is more legitimate than – and therefore, different from – gambling.
The largest financial players in the Forex Market are:
- Superbanks – The Forex Market is decentralized, so the world’s largest banks are the ones that determine the exchange rates. According to Investopedia, these are the banks that are “too big to fail,” a phrase that means “so deeply ingrained in a financial system or economy that its failure would be disastrous to the economy.“
- Large Commercial Companies – Companies that manufacture in one country but buy parts from another country must exchange currencies for business. These companies do not deal with the same massive volume that the superbanks do and usually deal with commercial banks.
- Governments and Central Banks (Federal Reserve, Bank of England, etc.) – Much like the large companies, governments exchange currencies when operating on the international field. Central Banks often engage in massive Forex market operations to manipulate exchange rates.
- Speculators – If you get into the Forex market to profit, you will fall into this category. This is also the area of Forex trading that would be comparable to gambling.
Hillel Fuld with Daily Forex suggests that these players lend more legitimacy to the Forex market because gambling is “always facing challenges on a legal front.” Fuld also comments that, with the Forex Market, “you know the law and morals are on your side.”
Superbanks, commercial companies, governments, and central banks exchange currency as a necessary part of operating globally. For them, it is a risk that is a part of their business. For speculators, the risk isn’t necessary. The goal of the exchange for the speculator is to exchange it back again at a better rate; therefore, it is a gamble.
The Inherent Risk of Trading on the Forex Market
The Foreign Exchange market is open 24 hours a day, five days a week. As a result, the market does not just fluctuate every day – it fluctuates every minute. However, these fluctuations tend not to be drastic because so many traders are actively trading such high volumes of money at any given time.
That’s not to say the fluctuations can’t be drastic. A nation’s currency is also affected by that nation’s political stability. The market responds quickly to real-time political, social, and economic events. Political instability tends to lead to a depreciation of the exchange value of that nation’s currency.
Further, the centralized bank of a given nation might engage in a massive buying and selling operations to manipulate the exchange rate of its currency. These banks do this because they believe their currency is either undervalued or overvalued.
(Sources: City Index; Admiral Markets; YourArticleLibrary)
No matter how much technical analysis and research are done before making a Forex trade, the element of chance will still play a part in the outcome. There is always a risk of loss. Successful traders, like successful gamblers, will have risk and money management skills to make sure they can keep playing the game.
By definition, Forex speculation is gambling, but it does have better odds of winning than you will find in casinos. While it may not be legally classified as gambling, this is likely because the Foreign Exchange market is used legitimately by financial institutions, companies, and governments.