I have come to realize over the years that most people misunderstand the difference about financial investment and gambling in respect to the financial markets. Our focus will majorly be the FOREX market though we have other financial markets like the stock markets, binary options, bonds, securities etc. In order to get a clear idea or picture of the subject matter, we need to define and differentiate between financial investment and gambling.
First of all, we need to understand the definition of an investment? Investment is a conscious act of an individual or any entity that involves deployment of money (cash) in securities or assets issued by any financial institution with a view to obtain the target returns over a specified period of time. We can also say investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. With this simple definition of investment, we can deduce that financial investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
On the other hand, gambling can be placed in the same category as “speculation”. Gambling is the wagering of money or something of material value (referred to as “the stakes”) on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods. Gambling thus requires three elements be present: consideration, chance and prize.
Be sure not to get ‘making an investment’ and ‘speculating’ confused. Investing usually involves the creation of wealth whereas speculating or gambling is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing.
In FOREX trading, the concept of financial investment has to be applied in order to become wealthy or successful. Most traders approach the FOREX market wrongly with the concept of gambling. They fail to understand that wealth is being created by compounding or accumulating profits gradually on an investment over a long period of time. For example, a trader whose initial investment is 1,000USD and plans to make a constant 30% ROI every month is termed as a financial investor. Whereas, a trader who wants to make 300% ROI every month on a 1,000USD may be referred to as a gambler. It’s not that 300% monthly ROI isn’t achievable in trading but it may seem difficult with all the market challenges and might trigger the wrong emotion when trying to be a gambler.
Truly speaking, from another point of view, FOREX trading might seem to look more like a casino kind of game but it actually isn’t it. Gambling is random; trading is exercising discipline to take advantage of repetitive market patterns. Is trading guaranteed? Of course not, but just because something is not guaranteed doesn’t mean its gambling. Gambling is betting on events that are not predictable, not even theoretically. At the time of placing the bet it cannot be determined from any factors that are known at this time whether it will be more likely to win or to lose. And the statistical expectancy is always zero or negative (otherwise it would have been a profitable business). Gambling is a game of pure luck and nothing else.
Trading is betting on events where at least a theoretical chance exists that one is able to tell profitable trades from losing trades *before* placing the bet, there exist factors that can be known before the event that influence the outcome. It is not purely a game of luck; there is a skill factor to it that will influence the outcome. There exists the chance that the trader is skilled enough to reach positive expectancy simply by using the knowledge about likely outcomes before placing the bets. Therefore it does not fulfill the definition of gambling; instead it fulfills the definition of business.
In conclusion FOREX trading is not gambling. You need fundamental analysis, technical analysis, money management, patience, discipline and some skills to be a trader. The fact that you have all these factors in place doesn’t mean you won’t have loosing trades but combining these gives you higher odds for winning trades, these factors provides an understanding of probabilities and outcomes.