You probably have heard a little about Forex trading now and you’re interested to get into it.
I think some people have extremely unreasonable expectations for their Forex earnings. If I can make 2 - 5% in a mo. Well – in and of itself Forex trading IS NOT GAMBLING. That is because all you are doing is speculating on currency pairs. BUT There are many mechanisms around the market in which crafty individuals and organizations scam people. All for their own greedy gains. This has often lead people to feel that forex trading is gambling.
However, you have a concern…
And the concern is whether Forex trading is gambling.
I get it.
Before I got into trading, I was interested to know whether it’s really possible to be profitable in Forex trading…
Or was it like playing against the casino knowing that I’ll NEVER win in the long run because the odds are against me?
So is Forex trading gambling, or is it legitimately a place where you can consistently earn an income from?
Let’s find out.
The Definition of Gambling
To understand whether or not Forex trading really is gambling or not, we need to understand the definition of gambling.
So let’s take a look at 3 definitions of gambling by different sites.
In Dictionary.com, gambling is defined as:
- the activity or practice of playing at a game of chance for money or other stakes.
- the act or practice of risking the loss of something important by taking a chance or acting recklessly:
In Wikipedia, gambling is defined as:
- the wagering of money or something of value (referred to as “the stakes”) on an event with an uncertain outcome, with the primary intent of winning money or material goods.
And in Encyclopedia Britannica, gambling is defined as:
- the betting or staking of something of value, with the consciousness of risk and hope of gain, on the outcome of a game, a contest, or an uncertain event whose result may be determined by chance or accident or have an unexpected result by reason of the bettor’s miscalculation.
So the common theme that these 3 sites are saying about gambling, is that it’s the act of wagering money on a game of chance or luck with an uncertain outcome.
So the question comes down to:
Is Forex trading really a game of luck, where you have no idea of your chance of winning?
Or is Forex trading a game of probability, where you can determine your chance of winning?
To understand this, let’s get into the most well-known place associated with gambling…
The Casino.
The Casino Gaming Model
Are casino games a game of luck or probability?
Let’s use the example of one of the most popular games in the casino – the Roulette.
The Roulette is a game where players bet on numbers on the roulette wheel and get a payout if the ball lands on their numbers.
There are different types of bet combinations on the numbers and different payouts.
If you bet on individual numbers, your payout is 1:35.
If you bet on either of the dozens, your payout is 1:2.
If you bet on red or black, 1st half or 2nd half, even or odd, your payout is 1:1.
For our purposes, we will use the red and black bets with the payout of 1:1.
That means if you bet $1, you will win $1.
In the European Roulette Wheel, there are a total of 37 numbers.
You can see on the wheel that there are red numbers, black numbers and one green “zero” on the wheel.
So let’s say we bet on black.
Many people think that this is a 50 percent chance of a win.
But is it really?
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There are a total of 18 black numbers on the wheel.
So your odds of winning are:
18 black numbers / 37 total numbers = 48.65% (rounded up to nearest 2 decimal places)
So in actuality, you only have less than a 50% chance of winning each time.
Now you might be thinking:
“But Davis, this is close enough to 50%. What difference does it make?”
Well, my friend, this makes ALL the difference in the long run.
You see, while you may get lucky and win a few games and even walk out of the casino a winner…
But it doesn’t mean you will win in the long run.
That’s because it’s already been decided the moment you play the game that you will lose in the long run as the odds are against you.
For example, if you flip a fair coin, it will be a 50-50 chance of it landing in either heads or tails.
But if you flip the coin 5 times, it’s possible to get head all 5 times.
However, if you flip the coin 10,000 times, chances are that the probability will normalize and you’d get close to 5,000 heads and 5,000 tails.
Here’s a chart of a test done where a fair coin was flipped 32 times and was done over 50,000 runs.
You can see on the chart that the more times the runs were done, the number of heads gotten was 16 out of 32 times (which represents a 50% probability).
That means the more times the coin was flipped, the more the outcome normalized to the actual probability of the coin what was 50% to either get heads or tails.
Now, let’s get into the mathematics to show you your exact outcome when you’re betting on the roulette wheel.
For this, we use an expectancy formula.
This is to determine how much you win or lose on average for each time you bet.
If it’s a positive expectancy, it means on average you are winning a certain amount each time you bet.
If it’s a negative expectancy, it means on average you are losing a certain amount each time you bet.
The expectancy formula is as follow:
(Percentage Win x Average Amount Won) – (Percentage Lose x Average Amount Lost)
So assuming you’re betting $100 each time on the either red or black, your expectancy is:
(48.65% x $100) – (51.35% x $100) = – $2.70
This is a negative expectancy.
What this means is that on average, each time you bet $100 on red or black, you’re in effect losing $2.70.
Now, if you play just 10 times, you could leave the casino a winner.
But just like the chart shown on the outcome of coin flips, the more times you play the roulette wheel, the more the actual probability will play out.
And that means you WILL eventually lose your money.
How much?
Well, if you bet 100 times on red or black, then you’re expected to lose $2.70 x 100 times = $270.
In fact, if you didn’t know, all the casino games are designed for you to lose over the long run.
But the players going to the casino somehow think they can beat the casino.
In my opinion, that’s the real definition of gambling – playing in a game that has the odds against you but thinking you can win.
Is The Casino Gambling?
So here’s a very interesting question for you to consider…
Since the casino is in the category of “gambling”, is the casino also considered gambling against their patrons?
Back in the 1980s, there was a group of MIT students that went to the casino to play Blackjack and was said to have walked away with millions of dollars.
There’s even a movie called 21 that’s all about this group of MIT students.
This group of MIT students used a method of card counting to have an edge over the casino in Blackjack.
That means they used a method that has rigged the odds in their favor so they will win over the long run.
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This method was developed by a man named Edward Thorp.
He is a mathematician and even released a book about it called Beat The Dealer.
After that incident, the casino started to blacklist these people and anyone who is suspected of “card counting”.
Now if the casino was in the game of gambling, why didn’t they continue to allow the MIT students to play at their tables?
That’s because the casino knows that they WILL lose in the long run.
The MIT students have found a way to “beat” the casino.
It’s no longer a game of chance or luck.
It’s now a guaranteed winning game for the card counters and a losing game for the casino.
You see, the casino isn’t in the game of gambling.
They are running a business.
That means they have to ensure that they are profitable in the long run.
And the people who are contributing to their profitability are their patrons.
Hence, when they realize that the card counters had “rigged” the blackjack game in their favor, they had to stop them.
Many casinos now even implemented changes to their Blackjack tables…
Particularly using automated card shufflers to make card counting practically useless.
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So here’s the truth…
While the players at the casino are gambling, the casino isn’t.
That’s because they have already rigged the games in their favor so they know they will in the long run.
They know that in the long run over hundreds of thousands of bets, the probability will eventually play out to their favor.
This is their Edge.
That’s also the reason why the casino is open 24 hours and there’s no clock in the casino.
They even serve food, drinks, provide entertainment in the casino, and even give you free accommodation at their hotels if you gamble big enough.
They want you to stay there for as long as possible until their probabilities play out and you run out of money.
Redefining Gambling
So now that we understand that the casino, in reality, is not gambling because they know they will win in the long run…
We have to redefine what gambling is and how it relates to Forex trading.
So here’s my take on the actual meaning of the word “gambling”…
In my opinion, gambling is when you have absolutely no idea about the probability of you winning over the long run…
Or, you know that the odds are against you but you somehow hope that you can still be profitable.
In other words, you are depending 100% on luck to become profitable.
On the other hand, if you know the probability of you being profitable in the long run with statistics to back it up, then you’re not gambling.
You don’t rely on luck to win, but on your probability to play out in the long run, just like the casino business.
How To Be The Casino In Forex Trading
When you’re playing in the casino, you have no choice but to play the games according to their rules.
But that’s different in the Forex Market because there are essentially are no rules.
You can trade however you want, whenever you want, and the market won’t chase you away just because you’re winning.
But, of course, you can’t expect to win the game of Forex trading by randomly entering and exiting trades.
So the question now becomes:
“How do you rig the Forex trading game in your favor and treat it as a business like a casino?”
The answer…
By putting the odds in your favor with two things:
- Positive Expectancy
- Positive Swaps
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Positive Expectancy
Positive Expectancy is when you know on average how much your trading system will make per trade.
I’ve already gone through the expectancy formula earlier, but we’ll now dive into using it for trading.
To calculate this, you would need to know your trading system’s win/loss ratio and the average profit per win, and the average amount you lose per loss.
To get this data, you will have to test your trading system across many trades.
Generally, the bigger the number of trades, the more accurate the data will be.
But for a start, 100 trades would be able to give you a good idea of your trading system’s expectancy.
Once you have the data, you can calculate your expectancy using this formula:
(Win Percentage x Average Profit Per Trade) – (Loss Percentage x Average Loss Per Trade)
So if your win/loss ratio is 50-50, the average profit per trade is $100, and the average loss per trade is $50, then your expectancy will be:
(50% x $100) – (50% x $50) = $25
What this means is that you expect to make an average of $25 per trade.
So if you want to make $2500 for the month, then you would need to have 100 trades.
Positive Swaps
The other way to put the odds in your favor is through Positive Swaps.
Swaps are the interest rate differential between two currencies.
So if you are Long EURUSD, it means you are buying the Euro and selling the US Dollar.
And by doing so, there is an interest rate differential between these two currencies.
So when you hold a trade overnight, you are either paid a Positive Swap or you have to pay a Negative Swap.
And this depends on the currency pair and the direction of the trade you’re taking (i.e. Long or Short).
When you have both a Positive Expectancy trading system and Positive Swaps, you are putting the odds in your favor.
And because of this, you’ve rigged the Forex trading game to your advantage.
All you have to do then is to have good risk management, and let your probability play out over lots of trade to become profitable in the long run.
Conclusion
So after everything said here, is Forex trading really gambling?
Yes and no.
It’s gambling when you…
- Have no trading strategy or system, and you enter trades based on gut feeling…
- Don’t know what your win/loss ratio and trading system’s expectancy is…
- Are relying on luck to be profitable in the long run.
But it’s not gambling when you…
- Have a firm trading system in place with clear rules for your entries and exits…
- Tested your trading system over a large number of trades which resulted in a positive expectancy…
- Have good risk management and let your positive expectancy play out over the long run.
So whether Forex trading is gambling or not ultimately comes down to you.
Do you treat Forex trading like going to the casino and trade based on luck?
Or do you treat Forex trading like a business and trade with the expectancy of coming out profitable in the long run?
You get to decide.
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