Forex trading vs gambling: main differences and similarities

Since the forex market is really volatile and risky, people often ask themselves if trading forex is like gambling.

Even though it may seem so, forex trading and gambling are two different activities, and we will outline the differences in this article.

Trading forex and gambling are the same thing?

Trading forex is not like gambling because the “skill” component outweighs the luck component. However, less experienced traders may treat trading like gambling.

In fact, as Andrea Unger (professional trader and multiple world trading champion) points out in his article, forex is not gambling, but it can become gambling if the trader has the wrong approach: “When you listen to performances of x percent in a day, 200 percent, always look at what risk was behind it. And then you can judge if the bet was a bet, which is fine if you are aware of it, or if it was a trade. 95 percent risk on a trade, is no longer trading. It’s betting, gambling, it’s no longer trading.”

If forex trading were gambling, there would be no forex traders who were more profitable than others and professional currency traders who make a living from this activity and hold domestic and international trading tournaments.

In fact, you will never meet a professional roulette player, or a professional slot machine player, because they are activities that rely solely on luck.

Forex trading can be compared to Poker, where there is a component of luck, but at the same time, there are professional Poker players because they know how to put themselves in a position to win a hand.

Thus, the poker player and the forex trader know that there is no way to predict with absolute certainty the outcome of a trade or hand. However, they also both know how much the percentage of risk of loss is in a hand or trade and consequently how much they can risk making sure that the risk/reward ratio is positive and on their side.

The best forex traders (and poker players), therefore, try to make sure that the odds are in their favor.

Reasons why forex is not gambling

Market analysis: when you play the slot machine, all you have to do is pull a lever and hope for the best. Forextraders, on the other hand, conduct careful market and technical analysis before placing a trade to identify recurring trends and patterns. In this way, they try to predict with as much certainty as possible what will happen in the immediate future thanks to historical data and mathematical factors.

Risk management: in gambling, there is no way to manage risk, as the risk/reward ratio is fixed and set by the casino. When trading forex, on the other hand, one can decide to set up the trade in different ways and with different techniques, so that one can decide from time to time whether it is worth taking more risk based on the state of the market.

Regulation: forex brokers and the casino world are regulated by different bodies. Regulated forex brokers are overseen by independent financial institutions, while casinos are most often regulated directly by the state.

Skill expression: this is one of the main differences between trading and gambling as in gambling the odds are fixed, however any professional currency trader is able to make sure that the odds are on their side. In contrast to gambling, therefore, in forex, good traders can make money over the long term.

Social aspect: gambling was born to appeal to people’s emotionality with the illusion that they can become rich if they have a stroke of luck. Forex trading, on the other hand, was born to speculate on the value of currencies, and the fact that so many forex traders try and lose money in doing so is a consequence of the extreme difficulty in obtaining the skills needed to succeed.

Addiction: forex trading, unlike gambling, is not designed to be addictive. In fact, if you have already tried to trade forex, you will rapidly realize trading platforms are very “boring” when compared to the average online casino.

Why is forex trading considered gambling by some?

Uncertainty: although forex markets make it possible to predict with more certainty what will happen in the future, it also, like gambling, has the component of uncertainty, and consequently also the factor of luck and odds.

Risk of losing money: both forex and gambling are risky, although for different reasons. In each case, both currency traders and gamblers can suffer large capital losses.

Psychological factor: forex trading, like gambling, is capable of giving emotions such as greed, fear, or excitement, which can lead people to make poor and impulsive choices.

Market makers: there are different types of forex brokers, and market makers are among them. Market makers are forex brokers who are the counterparty for all orders (i.e., they buy what the forex trader sells, and sell what the forex trader wants to buy). This approach at first glance recalls casinos and the saying “the house always wins.”

Similar strategies: in forex trading, there are trading strategies and trading modes very similar to gambling such as spread betting or binary options.

Forex gambling-like trading techniques

Martingale strategy: the Martingale trading strategy is to increase the trading size of a position every time a loss occurs, with the hope that the trend will reverse and losses will be recouped. This trading system is very similar to that used in casinos where after a loss one tries to bet more and more with the hope of recovering losing bets.

Lottery trading: very common in the crypto and stock market, but nonetheless also present in the forex world, means opening positions always on the same asset (or multiple assets) with the hope that they will exponentially increase in value. The problem with this strategy is that even in the event that one actually wins the “trading lottery,” the payoff may not necessarily exceed the amount spent.

Binary options trading: binary options are the riskiest derivative in the entire forex world, so much so that in the European Union, the UK, Australia, and many other countries they are banned and brokers cannot offer them to their clients. Binary options are effectively all-or-nothing bets where if the bet succeeds, you earn 100 percent of what you bet, while conversely, you lose everything you bet.

Forex spread betting: spread betting essentially means earning (or losing) the amount of the bet based on how many pips the forex market has moved. For example, if you bet $10 on the EUR/USD pair, and the exchange rate goes from 1.0000 to 1.0010, your net gain will be $100 (i.e., 10 pips * $10). This mode of trading forex is widespread in the UK forex market but remains illegal in some areas such as the European Union.

Scalping: scalping is a trading strategy of opening and closing orders within minutes or seconds, trying to profit from micro-fluctuations in the forex market. Professional forex scalpers have uncommon analytical skills because they have to make decisions in very few seconds. However, this approach to some recalls gambling characteristics because scalpers have little time to analyze the market well and use experience, intuition, and split-second decisions to place trades.

The point of view of Islam in forex and gambling in Islam

Islam gives additional keys that can help further understand the differences between forex trading and gambling.

In Islam, there are a set of religious laws (the Sharia) that distinguish what a good Muslim can do (or what is “Halal”) and what a good Muslim should not do (or what is “Haram”).

Well, according to Sharia, forex trading is Halal, while gambling is Haram. Here are the reasons for this distinction.

Ethical nature: according to Islam, trading is a productive activity involving the exchange of goods and cooperation. In contrast, gambling is an activity that promotes exploitation, and greed, and by nature does not allow for the development of a positive skillset. The only unethical factor in forex is the interest fee (Riba), but this can be removed with the use of specific accounts for Islamic traders.

Uncertainty: in Sharia, all financial transactions that are too uncertain (Gharar) are prohibited. Although forex trading may fall under this, according to Islam, risk and uncertainty can be reduced with a good technical analysis of the markets. In fact, again according to the concept of Gharar, trading techniques such as forex scalping are Haram as they are considered too uncertain because scalpers cannot do an in-depth analysis of the market with technical indicators and other tools.

Risk aversion: In forex trading, there are two counterparties, namely the seller and the buyer. In this case, both assume the potential risks of losing money, making the trade risky but fair. In gambling, on the other hand, there is the casino that is in a position of power over the gambler, making the transactions unfair.

Skill factor: forex trading requires knowledge, experience, study, and practice. In contrast, in gambling, there is mainly the luck component.

Social impact: trading is considered a way to contribute to the welfare of the trader himself, his family, and also society (as long as the forex trader is profitable). Gambling, on the other hand, is associated with addiction, the inevitable loss of money, and the ruining of families and relationships.