Let’s take a look at a more specific example of blackjack odds to get a better understanding of where the comparisons between forex trading and gambling hit a roadblock.
One of the most important characteristics of blackjack, as well as any other casino game, is that no matter how professional a player is, the house will always win in the long run. Granted, some people will win big prizes, however, the total losses will eventually cancel out winnings and turn the balance positively towards the casino. In a typical casino, the more you play, the more you are likely to lose.
In gambling, the house is the ultimate winner, because the gambling house has an edge over its customers, which makes opening a casino a viable business in the first place. In blackjack, a player has to always act first when the first round of dealing is over. And when they hit a card (demand another card from the dealer) and bust, i.e., the card values go over 21, they lose, even if the house goes bust as well. Interestingly, the chance of this happening is about 28%.
Another detail that needs to be mentioned is that every hand value has a specific probability of busting a player. For example, if a player has a hand value of 11 or lower after a starting hand, there is a 0% probability that they will bust. Immediately above the value of 11, this probability increases massively: 12 hand value – 31% chance of busting, 13 hand value – 39% chance of busting… By the value of 20, the probability of busting is 92% and at 21, a player is nearly guaranteed to bust by hitting an extra card.
Now, players can use different techniques like doubling down to increase the payouts, splitting the pair, etc. to reduce the odds that are in favor of the house. However, the house has the upper hand regardless of the measures taken by the player.
Trading Forex isn’t gambling – Here’s why
Unlike gambling, there is no “house” in Forex trading. Your competitor on the market is another trader with their own interests. What's more, not all market participants are interested in making vast profits. The list of Forex market participants include: commercial banks, central banks, retail and institutional traders, governments, multinational corporations, etc. Multinational corporations do not focus on losing money when exchanging currencies. They trade currencies out of necessity, as they operate in multiple countries and need various currencies.
Psychological factors can do a lot of damage to your performance on the forex market. If you do not have a plan that you stick with, there is a high chance that you will lose money. It is essential to have clear expectations and objectives when trading forex to avoid overleveraging and excessive risk-taking. Knowing your risk tolerance is also incredibly helpful.
What differentiates Forex and gambling is that traders aren’t passive participants of the process where they’re intentionally put in a worse position by the market. By using various strategies and tools, traders have the ability to turn the odds to their advantage and get ahead of the market, and grow their trading balance.
Another key distinction between forex trading and gambling is institutional activity. For example, a pension fund is unlikely to hire professional poker players to make money, but they certainly employ forex traders to get ahead on the market. Additionally, proprietary trading firms also fund forex traders, while professional gamblers do not have such privileges.
How can a trader turn the odds in their favor?
There are different approaches and techniques in trading that enable people to make more conscious and well-thought-out decisions. Let’s have a look at some of the most popular ones:
- One of the most widely-used approaches is to incorporate technical analysis into trading. With this method, traders can further minimize the resemblance with gambling by minimizing the randomness of a trade. Technical analysis allows people to observe prior price movements, analyze them, and speculate in which direction the market will move. And there are lots of technical indicators that make this possible;
- A trader can also conduct fundamental analysis with the help of different economic indicators. By using this method, they can observe the current state of a company, market, or an economy, assess their strengths, and determine whether the price of an asset will increase, decrease, or stay the same;
- There are also various risk management strategies that add stability to their portfolios. For example, a trader can diversify their portfolio by using different trading instruments.
- Traders can search and develop trading strategies, test and backtest them using trading platforms to see which strategy can give them an edge over other market participants.
Obviously, these aren’t the only strategies that help traders increase their odds of success, as there is no way of consistently predicting the exact future price points on a chart. However, they still give traders a better chance of achieving success and getting ahead on the market.
FAQs
Here are some of the most common mistakes that both beginners and experts make and how you can avoid them.
- Using high amounts of leverage. Leverage is a double-edged sword. ...
- Not paying attention to technical trading indicators. ...
- Revenge trading. ...
- Taking positions anticipating the news.
Is Forex essentially gambling? Yes. With every trade placed, a trader is a attempting to predict moves to get profits. Statistically speaking the higher the risk reward ratio, the higher the chance of the trade turning into a losing trade.
Why do most people fail at forex? ›
The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
What is the problem with forex? ›
Counterparty Risk
In forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or clearinghouse. In spot currency trading, the counterparty risk comes from the solvency of the market maker. During volatile market conditions, the counterparty may be unable or refuse to adhere to contracts.
Do most people lose money trading forex? ›
Over 90% of traders lose money in the forex market. This is due to so many factors like lack of good trading knowledge and lack of proper trading system. Many traders who lose money in the forex market are found to be use technical indicators which is a no go area if you want to be successful in the forex market.
What days should you avoid trading forex? ›
The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs. Saturdays and Sundays tend to be the least favourable days for trading forex. Most traders tend to avoid trading forex during holidays and around major news events.
Is forex a skill or luck? ›
The role of luck in forex trading
While luck may play a small role in some cases, successful traders rely on skill, knowledge, and experience to make profits consistently. Luck can be a factor in short-term gains, but in the long run, it is the trader's abilities and strategies that determine their success.
Is gambling better than forex? ›
However, with proper education, practice, and risk management, Forex trading can offer more control over your fate. Sports betting, on the other hand, may require a little extra luck, and even the best analysis cannot guarantee a favorable outcome.
How realistic is forex trading? ›
With proper education and risk management strategies, forex trading can be a realistic and viable option for individuals looking to make money in the financial markets.
Who controls the forex market? ›
The foreign exchange market is decentralised and there is no organisation that controls it. However, commercial banks act as market makers, and central banks have significant powers and can influence the market.
According to research, the consensus in the forex market is that around 70% to 80% of all beginner forex traders lose money, get disappointed, and quit. Generally, 80% of all-day traders tend to quit within the first two years.
Why are forex traders not rich? ›
This liquidity makes the forex market a very attractive market for traders. However, with great potential for rewards comes great risk. The forex market is highly volatile, meaning that prices can change rapidly and unpredictably. This volatility can lead to both high profits and high losses.
Why not to invest in forex? ›
Risks of forex trading
Most FX trading products are highly leveraged. You only pay a fraction of the value of your trade up-front, but you are still responsible for the full amount of the trade. Exchange rates are very volatile. They tend to move around a lot even within very short periods of time.
What percentage of forex traders are successful? ›
This is because many traders are new to the market and do not have a sound trading strategy. They may also be overtrading or taking on too much risk. According to research, only about 20% of forex traders are consistently profitable, and the remaining 80% struggle to break even or lose money.
How much can forex traders make a day? ›
Day traders' average income depends on the individual's experience, decision-making ability, and the amount of capital being put at risk. Success in terms of profits can vary widely. While one Forex trader may earn up to $10,000 in one day, another day trader working on the same pair may earn only $1,000 in one day.
What is the biggest risk in forex trading? ›
There are two main risk factors that come with forex trading: volatility and margin. Let's examine what each is in turn, before we take a look at how to mitigate them.
How many people fail at forex? ›
According to research, the consensus in the forex market is that around 70% to 80% of all beginner forex traders lose money, get disappointed, and quit. Generally, 80% of all-day traders tend to quit within the first two years.
Is it hard to be successful in forex? ›
Many people fail to become efficient traders, and don't achieve good results in the Forex market. In fact, a high percentage of Forex traders end up losing more money than they make. Learning to trade Forex or any type of financial market can be difficult and is certainly not something that you will pick up in a day.
Is it hard to get rich from forex? ›
It also involves a steep learning curve, as traders must understand complex concepts such as technical analysis, fundamental analysis, and risk management. Therefore, while it is possible to get rich from forex, it is by no means an easy or guaranteed path to wealth.
