Most of the time, people believe Forex trading is akin to gambling because of the high level of risk and a large amount of money involved. There are some instances that forex traders are compared to the freewheeling gamblers of Las Vegas or Macau. Professional traders and gamblers have a connection or two. Professional traders practice discipline as well as use an organized approach and effective money management while gamblers solely rely on odds to make money. Whilst these two concepts share few similarities, the word “profession” in “professional” draws the fine line between forex trading and gambling.
There is a huge difference between trading as a business and cashing in on chance. An article by Newsweek International, which was published on March 15, 2004, quoted Jay Meisler, founder of the Global Traders Association, who depicted their huge disparity of currency trading and gambling.
“Those who treat forex trading as if they were in a casino will see the same long-term results as when they go to Las Vegas… If you treat forex trading like a business, including proper money management, you have a better chance of success,” Meisler said.
Forex Trading
Forex trading (also called currency trading or FX trading) is the act of speculating on the foreign exchange market by buying or selling currencies. It is as simple as exchanging a particular currency for another or as complicated as trading currencies virtually around the clock, according to Investopedia. To be more specific, foreign exchange or forex covers everything – from converting currencies at a money changer shop to making billion-dollar payments by companies, financial institutions, and governments.
The exchange rate between two currencies is either floated or fixed. A floating exchange rate is a regime where the government let market forces dictate the currency price of a country based on the laws supply and demand. Market forces include investment, trade, tourism, and geopolitical risk. On the other hand, in a fixed exchange rate, a government or central bank sets the value of its own currency by pegging the official exchange rate to another country’s currency or the price of gold. This will enable them to keep a currency’s value within a narrow range.
The currency action happens at the huge and decentralized market, meaning millions of investors across the globe change hands at the over-the-counter (OTC) exchange 24 hours a day, five and a half days a week. All transactions are facilitated through computer networks between traders worldwide. Having said that, forex trading begins in Tokyo and Hong Kong when the trading day ends in the United States.
There are three markets where individuals, institutions, or entities trade forex – spot market, forwards market, and futures market.
Spot Market
This is where currencies are purchased and sold based on the current exchange prices dictated by supply and demand. These rates reflect economic situation, interest rates, political sentiment,
Forwards Market
Contracts are sealed in an OTC marketplace. Parties involved
Futures Market
This is where participants buy and sell contracts on public commodities markets. Such deals include the number of units being traded, delivery and settlement dates, as well as minimum price increments which cannot be adjusted to one’s preference.
One of the most vital elements of a successful forex trading is finding and employing an effective and efficient strategy. But it does not end there. A trader also develops certain good traits such as discipline, patience, fortitude, adaptability, mental toughness, independence, and forward-thinking. These qualities, which will allow them to craft and execute an effective gameplan for trading currencies, are learned and enhanced through time, with an ounce of hard work. This is not something a person can inherit from his or her ancestors. It also involves working on the strong points to mitigate the likely damage of weaker qualities.
Gambling
One may perceive gambling as a harmless, exciting, and low-risk social activity. As defined by Merriam-Webster, gambling is betting on an uncertain income and/or playing a game for money or property. This entails wagering on games and activities that hugely depend on luck. For some people, gambling may spark joy in their lives. Who does not love to make a stake on an uncertain event, whose result is solely shaped by chance, in order to earn more money?
In simplest terms, gambling is a game of chance. Oftentimes, the probability of losing an asset or money is usually higher than the possibility of wining. Gambling has three key components: consideration, risk (odds), and prize. The outcome of a bid can be as short as making a single roll of dice, spinning a roulette wheel, or betting the horse will get through the finish line; or as long as waiting for the result of a certain sports contest or season.
Forms of Gambling
Horseracing, lottery tickets, casinos, and online card games are some of the well-known forms of gambling. Mechanics of these games may be similar or different in more ways than one. But they are all the same – luring people to lay a bet on uncertainty. The gambling activity primarily associated with gambling is
Similar to forex trading, gambling is a major global commercial activity. As a matter of fact, in 2016 alone, the amount of money spent by the American people spent reached about $116.9 billion, based on data from H2 Gambling Capital.
Gambling is legal under the US federal law although the government has placed significant restrictions for interstate and online gambling. Moreover, every state holds the authority to either regulate or prohibit this practice within its jurisdiction.
Clearly, forex trading and gambling are similar in a sense that the two activities intend to cash in on uncertainties. Currency traders speculate on values of various currencies while gamblers risk their money on sheer luck. Both of them intend to gain a profit in the event their presumptions are accurate. However, a negative expected return is inevitable. There is no guaranteed outcome either.
In particular, inexperienced forex traders and casual gamblers have a lot in common. Both of them take the plunge without even crafting a well-thought-out game plan or knowing what they are getting into at the very least. So, even if they have a strategy in mind, they might not have tested it before putting it into action.
What are their differences?
Forex trading and gambling have differences,
Also read: Basic Forex Terms You Should Know
