Difference between forex trading and gambling

Forex Trading Versus Gambling.

Numerous attempts have been made to simplify trading in the forex market, and while a degree of success has been achieved in this area, trading forex is more than installing a trading platform, funding an account and clicking a buy or sell button on your computer.

In fact, trading has often been compared to gambling since a high degree of risk and speculative activity is involved. Nevertheless, some very important differences exist between the two.

The sections that follow cover some of the distinguishing differences between gambling and trading, and offer some techniques to optimize your trading technique accordingly.

Trading Versus Gambling.

Occasional gamblers do not tend to have much of a game plan or strategy when gambling, and for this reason they do not tend to win consistently. In essence, they just pay the house to play.

Even if they do have a plan, they might not have thoroughly back tested and demo traded it before implementing the strategy in a live trading environment. Read more on getting a demo account here.

Basically, these traders make up the gamblers of the forex market that essentially just make bets on the direction of the forex market. Often, such traders will eventually wind up losing some or all of their trading funds as they pay for the entertainment of trading in the forex market.

Trading Forex as a Business.

Although most people consider betting at a casino to be gambling, gambling on certain casino games can be approached as a business. This might include playing blackjack with a system for example.

A person playing blackjack who has achieved a high level of card counting proficiency can often get an edge on the house. This strategy can allow them to win consistently at the game, whether they need to count one, two or even five decks of cards.

The same idea generally holds true with a forex trader. First, the trader must have an underlying strategy which is applied consistently through a trading plan.

Second, the trading plan must be implemented with a high degree of discipline. Third, the trader will total up their winners and losers to obtain a net profit or loss. In this way, they endeavor to approach their trading activities as a business.

Furthermore, as they trade in this disciplined manner, the trader will have developed the sound trading methods which make up and objectify their trading system. This allows them to remove the risky elements of emotional involvement and gambling from their trading.

Of course, regardless of these measures, an inherent trading risk will always accompany the forex trading endeavor since the forex market moves, sometimes in rather unpredictable ways. Nevertheless, a trader with a sound trading plan and a businesslike approach will generally perform better than one who does not.

The Risk-Reward Ratio and How it Applies in Forex Trading.

A very useful technique which can enhance your trading and lessen the gambling aspect involves assessing the risk reward ratio. Computing the risk reward ratio basically involves comparing the risk that you are willing to assume to the projected return you expect to make on any given trade.

Analyzing the risk reward ratio on every forex trade may require a bit more effort than just determining the upwards or downwards direction for a currency pair. Nevertheless, your overall success will be more consistent, and this will improve your chances of achieving success as a forex trader over the long term.

Choosing Forex Risk Reward Ratios.

As a general rule, most seasoned forex traders will not enter into a trade unless the risk which they foresee for the trade is at least half of what the anticipated reward might be. This would make their minimum risk reward ratio 1:2, in that the trade involves taking a risk factor of 1 in order to obtain twice that amount if the trade works out.

Furthermore, by assessing your risk/reward ratio on a probability weighted scale, you can optimize your trading business and have a much better chance of success. Nevertheless, you want to avoid being too subjective about assessing the probability of different outcomes. Read more on how to assess the risk reward ratio in forex trading.

Basically, traders who prefer to gamble and fail to consider their risk reward ratio when taking positions in the forex market might want to ask themselves why they would want to spend their time playing around in a complex business that they have not taken the time and trouble to learn how to operate in successfully. Maybe their valuable time could be put to use more constructively elsewhere.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

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Forex Trading vs Gambling.

Forex, the foreign currency exchange market , is available for online trading 24/5. The pace is fast and there appears to be little governing the boundaries of behavior, so does this make forex more similar to casinos than like other investment opportunities? Yes and no. Trading forex is what you make it. It can be a risk filled hobby as dangerous and luck driven as a casino game, or it can be a complex and highly orchestrated investment business with a minimum risk element and a high potential for profit.

Everyone knows that financial trading comes with a high degree of risk, but often forex trading is picked out as being more risky than other types of financial trading. In fact, if you take a browse around the internet you will find a number of people claiming that forex trading is nothing more than gambling . However many large financial institutions around the world, and indeed individual traders, make consistent profits from trading forex market , so you can be pretty sure that they are not gambling.

As a forex trader , how much profit you would make hinges largely on your skills, abilities, and understanding of how everything works in the foreign exchange market. It takes time to master all these, but.

Gambling involves pursuing a return on investment that is well beyond the amount of effort put into the act. Although there may be some mathematical logic to it, price patterns and analysis are far less likely to play a role. Success in gambling is overwhelmingly based on luck and chance rather than skill, as games of chance rarely offer the opportunity to develop the skills needed to generate consistent returns.

In this regard, unsophisticated forex traders have a lot in common with the casual gambler. For example, the novice or not so savvy trader might start trading the forex market without ever having developed a well thought out trading plan . Basically, these traders make up the gamblers of the forex market that essentially just make bets on the direction of the forex market. Often, such traders will eventually wind up losing some or all of their trading funds as they pay for the entertainment of trading in the forex market.

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Laino Group register number 21973 IBC 2014. Risk warning: Please note that trading in leveraged products may involve a significant level of risk and is not suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary.

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The Striking Similarities Between Trading and Gambling.

There's an upside to how similar the two practices are.

"The market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, "Swing, you bum!"

On the surface, many traders have a strong distaste to being compared to the gamblers in Las Vegas, Macau, Dubai or any other designated gambling destination in the world. However, the similarities are incredible and can also help you get to the core of trading success.

Trading is simply a vehicle to generate cash flow just like a business but understanding the business of gambling can help you understand the business of trading.

Trading Is Like Gambling.

When it comes down to trading any market, you're dealing with odds. We've looked at situations like the Canadian Dollar or Emerging Markets which had a favorable economic picture with which you could buy a stronger currency like the British Pound or Euro. By taking that simple example of weak commodity currencies or emerging markets in early 2014, the odds were tilted, but not guaranteed, for a trade that took advantage of that imbalance in the market.

As you may know, if you've gambled yourself, many people who visit casino's step up to a table to play a game with money on the line and try and earn back their costs for the hotel or flight. However, the massive casino that they've stepped into was built with the money lost by people before them who didn't understand the odds that the casino that hosts the game makes sure the odds are tilted in their favor.

Therefore, to transform from a trader that loses money, you must look at how to tilt the odds in your favor like the casino does for their benefit.

Improving Your Odds to Trading, Just Like a Casino Does.

If you walked up to two people and asked, is gambling a profitable business? You'd likely get two different answers.

The person who doubted that gambling was a valuable and long-term method to build wealth in this example is someone with dollar signs in their eyes. They may have figured if they could find a good system with which to place bets; they could take some money from the casino, however, after a few visits to a couple of gambling houses wound up down a few more thousand than expected after costs for the flight & hotel.

Now, what if the other person that you asked if gambling was really a profitable business owned one of the largest casinos in Las Vegas? Do you doubt that their answer would be an emphatic, "yes!" Same question, but two different systems. So how can you take this to put the odds in your favor, just like a casino owner?

Stacking the Odds in Your Favor like a Casino Boss.

So what does a Casino boss understand that newer traders do not? Here's a starter list with their trading equivalent:

Casino: Focus on the overall profitability of the casino by keeping the casino open 24-hours a day You: Know that each trade is one of a thousand insignificant trades to build your career.

Closing Thoughts.

Trading and gambling are very similar. However, to benefit from the similarities you must increase your odds and think like a Casino boss. The best way to trade like a casino operates is to focus on fewer trades that align with your edge and having lower volatility of performance by keeping a disciplined approach to money management so that you don't take a significant drop in your trading progress.

Lastly, you should continue to take the long-view of your trading career so that you do not put too much weight on any one trade which often results in overtrading or trading too large of a position for your account equity.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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Differences Between Spread Betting and Forex Trading.

Spread Betting is a trading method in which a trader is placing a bet on the price movement of a specific financial instrument. While some people think that spread betting and forex trading are very similar, in fact there are a number of important differences between the two that need to be understood. Perhaps the most important difference between the two types of transactions is that spread betting is recognized as a form of gambling under the law of the United Kingdom while forex trading is officially recognized as a form of speculative investment .

Spread betting is different from the traditional forex trading in various ways. In spread betting, there is no actual exchange of the currency or purchase of the financial instrument that is being traded. Spread betting involves taking a position based on anticipating whether the price of a financial instrument will increase or decrease in the future. This form of betting means an investor will win or lose money based on the marginal variation of a particular outcome and the expected value spread quoted by the spread betting brokerage .

When dealing in any form of official financial speculation, such as forex trading, the investor must pay tax on their profits. Although these sums may seem small on each transaction, they will eventually add up and for the.

The biggest advantage of spread betting is that none of the profits are taxed. Forex trading is not tax-free, as you have to pay capital gains tax, as well as stamp duty. In spread betting, you need to put in only a fraction of the money you trade. This is known as margin trading . This means traders can trade in high value since they have to put down only a fraction of this price as the initial stake, if the price moves in the way desired by the trader the profit can be much more that in forex trading. However, the inverse is also true.

Forex trading being a long established industry is regulated to a higher extent, as compared to spread betting. Traditional forex trading is provided by more established brokerages or financial institutions such as banks that provide accounts in multiple currencies. Because of this it is always best practice when choosing a spread betting provider to always consider going with a regulated brokerage. It is important to note that because spread betting involves high leverage the potential of losses from spread betting can be enlarged.

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Difference between forex trading and gambling

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