How to defeat your inner gambler

Dear Traders,

Have you ever asked yourself why professional traders sometimes say that trading is boring? Well the answer may simply be that they never gamble in the Forex market.

By definition, gambling is making a bet on the outcome of an event. We may place bets in sports contests, horse races, lottery, blackjack, roulette - but regardless of the gambling arena, the same problem remains. Namely, prediction i.e. where you can't stack the odds in your favor. Additionally, the prospect of winning a huge profit falsely motivates people to take abnormal financial risks and eventually leads to addiction.

Casino is usually a synonym for gambling. Check-out my explanation of some casino tricks that these organisations use to confuse people toward releasing their cash.

The difference between Forex trading and gambling

Gambling is a fixed odds system because the participant is bound to lose against the house. Therefore in craps, roulette, blackjack, or baccarat the odds are always at least 50.5% against you. That means that no matter how much money you have, if you play long enough - you will lose it all. The most important point to understand is that all casino games are fixed-odds configurations, so you should think twice before playing them.

In Forex, the trader must understand the tripod of successful trading first and have an underlying strategy that is consistently applied through a trading plan. The trading plan must be implemented with a high degree of discipline. Following both the trading plan and money management, stacks the odds in the trader's favor. In fact, in ideal market conditions, the odds can go up to 90-10 in the trader's favor. Of course the market is not ideal, but if you manage to get 60-40 odds by combining different strategies (e.g. scalping, intraday, intraweek) and strict money management, you will ultimately win. That's not something you can say with gambling. Check out the image below showing almost 30% gain in one of my Admiral markets accounts - that's an unheard-of profit when gambling long term.

Of course, even if you apply all these measures, there is always a risk accompanying Forex trading. Remember, the Forex market moves very occasionally in rather unpredictable ways. But the point is that those movements have already been charted once and by comparing history with the present moment, you can often foresee the outcome. Gambling is only a prediction and it lacks reaction, whereas Forex trading is both prediction and reaction.

For example, do you remember our perfect GBP/USD setup that happened on 20 January this year? We predicted that the price may move to 1.4200 and then drop. By applying various technical tools that were aligned with fundamental facts, we greatly stacked the odds in our favor. When the price hit 1.4200, we sold the pair and made 50+ pips. So we made a prediction (the analysis), followed by reaction (selling the pair at predicted level) and the result was profit.

Forex markets move with real economic news and the crowd's psychology, which is also completely different to gambling. In Forex we can place a stop-loss, scale in and take-profit. In gambling, we can't change a bet right in the middle of it.

Psychology of a Forex gambler

Gamblers are always having difficulties with money management. They are not able to control how much they spend in the casino and very often gamble with the money reserved for paying the mortgage or a rent. Stress is a constant follower, stalking the mind and threatening to ruin his/her life completely. It is not unusual for a gambler to borrow against equity of a home or other property for example.

Additionally, a fully fledged gambler develops so called gambler's conceit. Gambler's conceit was firstly described by David J. Ewing as a state of false optimism and self delusion. In this scenario a gambler believes they will be able to stop a risky behaviour while still engaging in it. This is often described as "I will quit when I am ahead". Usually it is an impossible task for them, as they have already developed bad habits that are engraved in their mindset.

Then there's gambler's fallacy, where a gambler erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect, because of course, past events do not change the probability that certain events will occur in the future. The gamble however, is convinced it is necessary to continue gambling because a streak of bad luck has to end at some point. An example of this is a Forex trader who holds on to a pair that has fallen in multiple sessions because they view further declines as improbable. This normally happens when they enter a counter trend trade which is almost certainly a loss. Other traits of a Forex gambler include:

• holding on to a position for too long
• overleveraging (Enlarging position size)
• chasing the markets
• revenge trading
• taking trades without any fundamental or technical validity
• jumping in a position based on a "feeling"
• Martingale Strategy without any technical or fundamental analysis
• trading based on gut feeling.

How to defeat the gambler within yourself

If you are internally struggling to win the war between Forex gambler and professional trader - check-out this video for some simple yet effective tools to tip the battle in your pro favour.

Is there something you want to add about gambling in the Forex world? Feel free to leave your comments below.

Cheers and good trading,

Nenad and Chris