Gambling Vs Forex Trading

The truth is simple. Forex trade is not gambling, but most folks actually treat and exercise it as gambling. If we approach forex trading with no implementation of money management and risk management it is pure gambling, and if we approach forex. Indeed, trading has also been compared to gambling because it entails a high degree of risk and speculative activity. However, there are some very big variations between the two. In the trading field, there are no rules, it’s just you against you and you will be the winner or loser.

Gambling and trading are way 2 different things, but many people treat both the same way just because they have some similarities, it's exactly like you are treating your current wife the same way you was treating your ex just because you noticed many things in common between both of them, yet they are 2 completely different persons. While both gambling and trading are governed by probability, the difference between gambling and trading is a very fine line. However, it plays a huge role in determining a trader’s success in the long term. Simply put, when money is placed on a bet that has a negative expected value, is called gambling. At times, a gambler might get lucky. Today’s lesson is going to open your eyes and help you decide if you are trading or gambling, so I want you to read the whole thing very closely, three times over if you have to. Forex Trader or Forex Gambler? - You should read today’s lesson even if you don’t think you have a problem with gambling in the markets, because you will surely pick up some useful advice that will work to.

With the value of the Australian dollar falling more than 10 cents in the past few months, should we all be hedging our bets and trading the Aussie for a fast profit?

There’s no shortage of foreign currency trading companies spruiking their services online, keen to help Australians become foreign exchange traders, with the promise of easy returns.

Forex trading can be risky for mum and dad investors, and should never be treated as an investment opportunity. In Australia, it is disappointing companies can promote forex trading to unsophisticated investors, by advertising prominently in magazines and online.

A zero sum game

For more than a century, the average real return on investment in the share market has been in the order of 6%. Of course some investors do better than this, and some do worse, but buying and holding shares in a diversified portfolio should yield a solid return over long periods.

But in the case of exchange rates there is no reason to believe investors receive anything more than a zero return from trading. There is very strong evidence that a currency like the Australian dollar moves in directions that are completely unpredictable.

Investors should also be wary of forex trading due to the high leveraging of many promoted forex products, where traders use borrowed money for their trades, and increase the potential loss.

The Australian Securities and Investments Commission (ASIC) (https://www.moneysmart.gov.au/investing/complex-investments/foreign-exchange-trading) explains the risks of foreign exchange trading for consumers, by way of an example of a typical foreign exchange trader who invests A$500 in a margin contract to buy Australian dollars at $0.91. If the Australian dollar rate falls to $0.885, the trader will lose A$2825 – and will actually have to pay another A$2325 in addition to the original A$500 in order to close out this contract.

Volatility rules

How unpredictable is the Australian dollar? In December 1983, when the dollar was floated, the exchange rate was $0.90, remarkably close to the exchange rate today - 30 years later.

More than 10 years ago, the lowest point of the Australian dollar was under $0.50, and more recent highs have been close to $1.10. In eight of the past 30 years the Australian dollar has moved by more than $0.10 in a calendar year.

There is no question that there has been, and is likely to continue to be, a huge amount of volatility in the exchange rate, but a considerable body of academic research finds little or no predictability in floating exchange rates.

As early as the late 1970s, work on the random nature of exchange rate movements confirmed the unpredictability of exchange rates floating against the US dollar. Despite a range of academic literature which tries to find predictability in floating exchange rates, empirical studies have not found any compelling evidence that exchange rates can be successfully forecast.

If exchange rates are unpredictable why would anyone trade forex?

Many do so in the ordinary course of their business. A clothing retailer in Australia might import goods from China and needs to pay its suppliers in US dollars in a few months time. In order to “hedge” the risk of a rising US dollar, the retailer might decide to purchase a foreign exchange product (called a forward contract), which locks (at today’s rate) the cost of the future US dollar commitment.

But there are many examples of companies that do not hedge (when sometimes perhaps they should), and also of companies that hedge when they do not need to and subsequently get into difficulty. Hedging forex risk is a complicated business, and even multinational companies need to tread carefully.

Unpredictability means that for every forex trader who wins there is at least one trader who loses. The only sure winners in forex trading are the forex companies that collect fees and make money on the foreign exchange spread (the difference between the buy and sell price), thus ensuring that on average, individual forex traders make a negative return. Borrowing money to trade forex is not a sensible strategy, and not one that any investment advisor ought to recommend.

Time to tighten the rules

In the regulator ASIC’s view, even with years of skill and experience, forex trading remains risky. Despite these warnings, companies advertising online forex trading are able to convince traders they can learn forex trading in a few short lessons, and make it easy to set up a trading account and “start trading in just five minutes”.

If we allow people to bet on the flipping of a coin, it’s probably fine to bet on whether currencies rise or fall. But let’s call it what it is – gambling, not investing, and regulate the industry accordingly.

Regulations should specifically stop private investors from leveraging forex trades, and also limit advertising by forex trading companies, so that individual traders are properly informed of the risks.

What is the difference between spread betting and forex trading?

Foreign exchange is a vital part of today’s interconnected global economy. Companies require foreign exchange for paying for goods in another currency and dealing with international employees. People require it whenever they are travelling abroad, paying for their child’s education or paying mortgage for real estate overseas. This guide is designed to help investors and individuals understand the basic differences between spread betting and forex.

Understanding Forex Trading

Traditional forex trading in simple terms is selling a particular currency and getting another currency in exchange, as per the existing exchange rate between those two currencies. For example, a trader will sell GBP£ 100 to get approximately US$ 140 at a rate of 1GBP=1.4USD. If the price of the held currency rises, in this case USD, the trader can make a profit by selling the USD. The difference between the buying and selling rate is the trader’s profit. There is no universal exchange, so most of the transactions are made over the counter, where individual buy and sell transactions are matched. Once a deal is finalised, known as a spot deal, there is an exchange of the currencies between the two parties.

Understanding Financial Spread Betting

Gambling Vs Forex Trading Platform

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. Besides foreign exchange, spread betting can be conducted on a wide range of financial instruments, including interest rates, individual share prices, indices, price of commodities etc. Depending on how a trader expects the market to move, he/she can either put in a ‘Long Buy’ (anticipating a rise in price) or a ‘Short Sell’ (anticipating a fall in price). Spread betting is further illustrated by these examples:

Case 1: The trader expects the price of the financial product to rise. The trader assumes that the GBP to USD exchange rate will increase, assuming the exchange rate is 1GBP=1.14USD. The trader places a bet of £20 for every 0.1-point rise in the exchange rate. (long position). With this, there will be two possible outcomes:

• If the exchange rate increases from $1.14 to 1.70 (a 0.56-point rise), then the trader’s profit will be 56 X 20, which is £1120.
• If the exchange rate fell from $1.14 to 1.02 (a 0.12-point fall), then the trader’s loss would be 12 X 20, which is £240.

Case 2: The trader expects the price of the financial product to fall. The trader assumes that the GBP to USD exchange rate will decrease, assuming the exchange rate is 1GBP=1.14USD. The trader places a bet for £20 for every 0.1-point fall in the exchange rate. (short position). There will be two possible outcomes:

• If the exchange rate increases from $1.14 to 1.70 (a 0.56-point rise), then the trader’s loss would be 56 X 20, which is £1120.
• If the exchange rate fell from $1.14 to 1.02 (a 0.12-point fall), then the trader’s profit would be 12 X 20, which is £240.

The profit or the loss with respect to spread betting depends on two things.

• The stake size, which is the amount an investor bets for every point increase.
• The points drop or gain of the underlying financial product, which the investor has put his/her money in.

What Are The Pros And Cons Of Both Investments?

Investors should be aware of the pros and cons of both investments before making any financial decisions:

• 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. The loss can be significantly higher as opposed to forex trading, if the movement in price is opposite to what is desired by the traders. In traditional forex trading, the trader has to put down the entire amount of the trade, so the profit or loss is limited to the amount the trader has put down in the trade
• 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.

Best Forex And Spread Betting Providers

Traders and individuals that want to trade forex, binary options and spread betting will benefit from working with a long established and trusted broker like ETX Capital. If you would like more information on ETX Capital, read our full review of ETX Capital here.

If you would like to see the best spread brokers available, read our comparison of spread betting brokers.

Other key firms dealing with binary options, spread betting and forex include ZuluTrade, AxiTrader and Spread Co.

Gambling Vs Forex Trading Platforms

Traders and individuals should keep in mind that their capital is at risk when they make any investments.