When Trading Becomes Gambling...

Can we class trading as gambling? Are these two activities more similar than we think and is profitable trading simply down to a run of luck? This is a question I have been asked on numerous occasions by newcomers and naysayers. "You are just a glorified gambler," is a comment which I have often had thrown my way and to someone who does not fully understand the structure and specifics of the money markets, I would agree that this could be taken as a fair statement. However, after structured financial education and some real experience in the market, we soon discover that there are many differences between gambling and trading; and if we enforce discipline in our trading practices, then the line between the two can be further solidified. I don't class myself as a gambler when I trade, in fact I do not even take part in any kind of gambling whatsoever as it is something that just does not interest me, but that is just my personal choice.

In the argument for trading not being a form of gambling, let me present you with the following scenario. I am a big football fan and like to regularly watch my team, Arsenal, play. Let's say I was attending our London derby game against our biggest rivals, Tottenham Hotspur, a few weeks ago and decided to place a bet on the game before kick-off for Arsenal to win. In this instance, I would have paid my stake money with the bookie and then hoped for a win to gain some profit – simple enough. However, let's say (hypothetically) that at halftime, Arsenal were down 2-0 and had a man sent off. In this case, the odds for an Arsenal comeback would have been greatly reduced, meaning that I would be likely to lose my stake money. Now, if I would have had the chance to claim back a part of my stake money and reduce my exposure, or better still, void the bet and get all of my money back, this would work the system way back in my favor but as we know, this is not an easy thing to do but would be ideal nevertheless.

Now, let's flip the situation to assume that Arsenal are up 2-0 at halftime and Tottenham has lost a player. The odds are now greatly on my side to win the bet and this would be a great time to be able to add to the bet for a bigger potential return or just claim back my stake money and be in a no-lose situation. Once again, not easy to do, but that's the problem with gambling. Trading, on the other hand, allows you to manage your position at all times and gives the speculator a far greater degree of financial control under various scenarios. Couple this with solid objective historical analysis, a system which gives you consistently larger average winners and smaller average losers, and now we have an environment very different from gambling...this is what trading is really about.

With this said, I would also like to illustrate to you when Forex trading can be classified as gambling. During the ongoing Extended Learning Track - XLT sessions, I work with my students to make sure that their trading does not become gambling in any way, shape or form, and this approach stems from solid rules, discipline and consistent strategy. One of the first things I work on is timing and showing them when it is safe to take a trade and when it is not. A common misconception among Forex traders is that they have an edge over stock traders because economic news is released to everyone at the same time, which entices the novice to think that they have a good shot at taking trades in reaction to the news. They see good figures posted so they click the buy button in anticipation of higher prices and click that sell button if the figures are bad – how simple can it be? I say this tongue-in-cheek as so often these trades end in failure and there are a number of reasons for this outcome. In my honest opinion, news trading is the only time when speculation soon becomes gambling. I would like to explore this topic in some more detail, so let's look back to a recent example, to be specific, November 6th and the Non-Farm Payrolls release.

Non-Farm Payrolls is notorious for big moves in the Forex markets due to the importance of employment figures within the economy. Novice traders assume that these big, violent moves in the market mean that they can easily make fast, large profits as well, which is a dangerous line to walk as they can just as easily lose their shirt in the blink of an eye. Take EURUSD for example. Above we have a chart of trading activity leading up to the NFP news release where we can see that the currency pair was trading in an indecisive range before the announcement. This is typical before a major economic statement as the majority of traders are sitting on their hands in anticipation of the data. Now let's flash forward to the reaction of EURUSD at the release of the figures.

The figures came out for NFP as worse than expected with a reading of -190K after a prediction of -173K. The second these figures were leaked, we can see that EURUSD had a violent spike down in price which typically suckers the newbie into a short position. The danger is that with the violence of the move, they go for the sell on a market order and face the prospect of slippage getting filled at a far worse price much lower down due to the speed of the market's movement. Upon entering the short position, the market then approaches an area where demand is greater than supply and decides to make a reversal, shown below:

Upon this price action, the news trader is now seeing their short position costing them dearly and upon the new rally in price, they decide to now reverse and go long at market to claw back some of those losses, once again facing heavy slippage in this frantic market action with a sloppy fill. Typically, however, after reaching an area where supply is greater than demand, the price once again decides that it wants to change its mind and drops back down to where it came from, as illustrated below:

Hopefully by this time, the novice trader decides that enough is enough and closes all positions for the day and walks away to lick their wounds...hopefully. I say this because in my experience, the majority of losing traders will sit there for the rest of the day attempting to claw back to breakeven and end up losing even more capital in the process. Personally, I have found that markets move with such irregularity during major news times that it can often be like stepping into a minefield. Sure, sometimes a trader can make some good money by getting on the right side of the market at this time, but it will be because of luck the majority of the time, not discipline and planning which as we know, are vital ingredients in the journey to consistent profits.

I really don't see the point in trying to knock out a quick, easy buck during violent news releases and put my fate in the hands of emotion when I know that 95% of the time, the markets move with liquidity and structure. I want to make my life as a trader easier, not harder. When we gamble, the odds are stacked against us. When we trade with structure and rules, looking only for the high probability, low risk opportunities in the market, we actually stack the odds in our favor. Which would you choose? If you still fancy a quick flutter, then leave the markets alone – you are much better off at the racetrack.