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Forex has gained growing popularity among retail traders because of its potential advantages such as high liquidity, the leverage tool, or tight spreads in comparison with other financial markets. There are competing perceptions of the nature of forex trading though: Is it a kind of investment or merely gambling? This blog post will help you to address the question.
Is Forex Trading Just Gambling or Not?
Before going to the exact answer, you should discover the definitions of both terms and the current situation of forex trading.
As determined by the Cambridge Dictionary, gambling refers to the process of betting on something such as a horse race or game to expect financial returns. Besides, when gambling, traders are risking their money to achieve something back.
Meanwhile, forex trading is the activity of selling one currency and simultaneously buying another. However, retail traders do not care whether they deliver or receive physical currencies. They speculate on the price movement and risk certain amounts of money with the expectation of financial gains, no matter which positions they are holding. This is known as CFD forex trading. the way forex traders work, accordingly, makes foreign currency trading akin to gambling.
Additionally, the deregulated nature of forex also raises concerns about the failure rate of less experienced traders or those trading forex by chance. Indeed, when participating in the market, forex traders are not legally bound to comply with any strict regulations. Although various brokerages are now under the supervision of some national and international organizations, forex traders come from a wide range of countries in the world, even some of which have yet to issue legislation to protect their citizens from adverse impacts of forex trading.
Further, some forex-related laws mostly prevent traders from money laundering activities, but not require how much they should initially invest in forex, which leverage ratio should be used or how large a position is advisable. Sadly, not all traders are capable of making a prudent decision on forex trading. As a result, the loose administration of the forex market will increase the probability of failure of traders.
Moreover, despite the diversity in forex participants, the pair value is predominantly driven by the operations of main players (e.g. commercial banks or central banks) whose large trading volume or monetary policies can affect supply and demand. When unexpected news is announced, albeit good or bad, it can move the pair price in the unprofitable direction.
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Still, many traders lack the knowledge and experience to analyze the market and price action fundamentally and technically. Rather, they can enter a trade arbitrarily without consideration of massive risks they may encounter. That is why a hefty 95% of losers in the forex market are recorded by Contentworks in 2020. All those realities of the market make governments doubt the safety of forex trading and suppose that it is nothing more than gambling.
Having said that, several success stories have proven that forex trading is also a type of investment if traders have proper trading strategies. So whether the nature of forex is investment or gambling still depends on the attitudes of traders toward this market. Without good preparations and suitable trading plans, foreign currency trading activities are similar to gambling.
Differences Between Forex Trading and Gambling
When being asked “Is forex trading just gambling?”, various traders on Quora and Reddit said yes without hesitation. Nevertheless, they also claimed that foreign currency trading was not purely a form of gambling, yet rather a combination of both gambling and investment. Accordingly, there are some distinctions between the two business terms as follows:
The most visible difference between forex trading and gambling lies in how participants play the “game” – in other words, how they employ tactics on transactions. Players in gambling games may use some dodges to place more odds in their favor, which hardly ensures their win rate. Meanwhile, the greater likelihood of making financial gains is recorded in forex transactions.
It is true that approximately 72% of retail traders in various European brokers end up losing, but the chief culprit is their lack of effective strategies and knowledge. When devising a trading plan, forex traders should consider trading goals (e.g. how much they want to earn per month and whether that target is realistic), the leverage ratio, the initial deposit, position sizes, types of orders (e.g. market or pending orders), stop-loss levels (i.e. how much they are willing to risk), take-profit levels (i.e. at which price they want to trade financial instruments), price action, economic and political events.
Also, traders should grasp the fundamentals of forex and how the market works beforehand. All those things distinguish forex traders from gamblers and also increase the winning percentage of foreign exchange transactions.
Unlike gamblers, forex traders are considerably supported by a wide range of trading tools and the international forex community. Available on a brokerage’s website, an economic calendar, webinars with financial experts and economic reports will help traders with the fundamental analysis. In the meantime, trading platforms such as MetaTrader 4 or 5 provide charts and indicators to technically analyze the market growth prospects. Those tools are difficult to be found in any gambling game in which traders must make sentimental decisions.
When playing poker or any casino games, players can utilize different techniques with the belief that they will have a 50/50 chance. Still, the reality has proven the opposite: the house almost has an advantage over players. No matter how hard they strive to play, the odds are seemingly stacked against them. They may immerse themselves in the game all day and occasionally achieve some insignificant wins if they are fortunate enough. Implicitly speaking, the house always has the upper hand over them. So despite ploys or tricks used to play the game, the probability of winning is nearly zero.
Compared to gambling, players in forex are much more legitimate and reliable. The foreign exchange market is completely supported by banks and some other institutions (e.g. hedge funds and investment management companies), which contribute the majority of trading volume to build high liquidity in the market. Normally, retail traders whose capital is much lower do not trade with those institutional players. Instead, the counterparty to their transactions on the retail market is often forex brokers, many of whom are regulated and licensed by legal authorities. This increases the credibility of every forex trade.
There are indeed various unknown events that significantly affect the price fluctuation and consequently a trader’s prediction. Having said that, forex traders still guarantee better odds of winning trades provided that they have proper strategies.
Trading Like a Professional Investor
When staying on the market, traders should wonder if they are trading like a gambler. Inevitably, if they want to amuse themselves by speculating on foreign currencies and do not bother about losses, they can gamble. Though, if they treat forex trading seriously, venturing money, in the long run, can incur a substantial loss. So to act as a forex specialist, traders should ask themselves the following questions:
- Do I fully understand the market and relevant terminologies?
Acknowledging how forex works will give you ease of access to the market. Indeed, learning about forex is alike to studying your major at university or college. Without comprehensive knowledge, students impossibly work as qualified employees in the real industry. In a similar sense, poorly-educated traders hardly make sensible decisions and may risk more than they expected in every trade.
Besides, understanding basics is a prerequisite for traders to go further in the forex market. Being equipped with fundamentals related to forex, traders can learn how to read charts or analyze price action technically and fundamentally before opening any positions.
- Is a brokerage I work with is legitimate and trustworthy?
Although various brokerage companies now are under the regulations of government authorities, the decentralized nature of forex has been exploited by many scammers. Accordingly, novice traders may be prone to fraud and deceit acts, for example, being tempted to unprofitable transactions and impossibly withdrawing profits from their trading accounts. In the worst-case scenario, they cannot take their initial investment back.
To avoid those unexpected events, you have to protect yourself from any money-laundering by seeking authorized and dependable brokers. You can easily check how regulated a brokerage is by looking through licenses provided by competent authorities on that broker’s website.
- Do I have a trading strategy that ensures the profitability of forex transactions for a long time?
As earlier stated, traders are encouraged to draw up a suitable trading strategy. However, that is just an on-paper idea. To ensure it works well in live conditions, you have to test it with at least 200 trades or within 3 months on a demo account. Any modifications are necessary if your tactic improbably guarantees the profitability of trades in the long run.
Inevitably, various unanticipated events, typically the US turmoil caused by violent Trump supporters in February 2021, take place and radically impact the currency’s value, hence affecting your whole trading plan. This is why you should spend weekends revising your strategy to increase the chances of success in next weeks’ transactions.
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