Yael Warman, Content Manager at Leverate, takes an interesting look at a topic that is frequently on the minds of Forex brokers, traders, and regulators: Is Forex trading gambling, or trading? There are differences, but there are also many similarities.
People tend to call Forex and Binary Options trading “gambling” and some folks get offended by this comparison because traders view themselves as more technical individuals who rely on intricate algorithms and formulas.
Yael Warman, Leverate
Me?
I’ve never really had a problem with the comparison because I realize that they both involve a certain level of risk that can be either reduced by solid research, risk management and proven techniques, or that can be increased by doing either activity haphazardly.
Look at the MIT Blackjack Team.
Armed with fake IDs and an intricate mathematical model for counting cards, a group of gifted college students set out to break Las Vegas’ casinos, proving that the house doesn’t always win. According to Jeff Ma, one of the members of the original MIT Blackjack Team, the first year he played, the team’s return to the investors was of 154% after paying all expenses.
I want to see Wall Street do that!
Blair Hull, the options trader who sold his market making business to Goldman Sachs, began his career counting cards in Las Vegas. Edward O. Thorpe is a phenomenal example of a correlation between gambling and trading. Thorpe began by applying his mathematical ability in casinos on and off the Sin City’s strip. After making thousands of dollars in Las Vegas, Reno and Lake Tahoe and being banned from most casinos in the area, Thorpe took his knowledge of probability and statistics and applied it to the stock market, where he has built a portfolio that has made him one of the most successful stock market investors in the world.
The comparison between trading FX or binary options and gambling isn’t so much about whether chance is involved, but rather about the type of personality you have. If your personality is the type that is looking for action, you’ll find that in both FX trading and gambling you get that exhilarating feeling that comes with get-rich-quick activities that have a typically unpredictable outcome.
Gamblers tend to play casually and not necessarily look to make a living out of it, although Ben Banker, a man who made a career out of gambling, may disagree. Traders on the other hand, take a more serious approach trying to earn a living.
While there is a major difference between gambling and trading in the ways in which risk is mitigated – take roulette for example: there are no loss-mitigating strategies. Once that wheel starts turning, you can’t set a stop-loss, you can’t hedge, you are pretty much stuck with your 1 in 33 chances of winning if you bet on a single number. Trading on the other hand allows you to set stop losses on your investment. Yet there are more similarities than there are differences:
- Both trading and gambling have the intention of creating capital gain over a short period of time, without creating new wealth.
- Except for the case of individuals who should seek professional help, both trading and gambling take place because the user has accrued excess wealth (over what they need to live).
- Good gamblers and good investors study behavior in order to take a look into the future. Gamblers look at other player’s mannerisms for cues and can remember their opponent’s wagers from 20 hands ago. Investors look at trading patterns in the charts and try to leverage the information to see where the market may be headed in the future.
Whether you hit the market or hit the tables, knowledge and preparation can set you apart from the crowd and make you a master of either craft.