September 19, 2014
How To Differentiate A Trader From A Gambler In Forex
I have a guest post for you today from Luke Peters that discusses some of the key differences between seasoned professionals and gamblers in the world of forex trading. I hope you find it useful.
Forex trading has often been associated with roulette wheels due to the high risks involved. Nevertheless, forex trading is more about market analysis than being a mere gamble, and making profits is not a matter of chance but requires acute anticipatory and risk bearing skills. While trading and gambling share several qualities, it is important for people to differentiate between trading and gambling to avoid higher losses and making large gains.
The major difference between gambling and trading is the involvement of chance. It’s always you versus yourself when it comes to forex trading and it is important to avoid the temptation of greed when trading in forex. If you are a new forex trader, here are some major differences between trading and gambling in forex.
Image Credits @ Jeff
1. Proper Analysis and Strategy
A gambler simply jumps into the market for the sake of making a trade in the market. As the forex market is open for trading 24 hours, several new traders often think of it as a profit earning opportunity. In forex, more and more trading without following a trading strategy will result in higher losses and small gains (if any). A professional forex trader formulates a proper trading plan and strategy and plans a proper entry point before jumping into the market.
2. Risk Management
Trading and gambling have a similar involvement of chance, but in essence, are quite different. While a gambler is totally unaware of the various risk management tools like stop losses and pegs, an experienced forex trader uses these tools to his advantage. While gambling focuses on taking a risk based on chance, forex trading requires proper measures to minimize the risks and maximize the profits on every trade. As forex is a highly fluctuating market the traders need to ensure that their hard earned money is not lost in vain.
3. Risk VS Rewards
The major line of divide between a forex trader and gambler is one’s focus on the risk and rewards. While gamblers only pay attention and are blindly focused on the rewards of a particular trade without caring much for the risks involved, the professional traders focus more on the risk involved in a particular trade and considers rewards only after the completion of a trade. The professional traders often seek the trade with the least amount of risk and the maximum profitability but also make calculated risks in a fluctuating market.
4. Emotional Ups and Downs
More than 90% of all trades in forex result in losses due to emotional ups and downs which lead to poor decision making. Gamblers often let themselves be controlled by their emotions and give in to fear and greed which makes them lose their money. Forex traders are often calm and patient people who know the risks of being in the game and follow a set and forget trading policy while making efficient use of tools like take profit and stop losses.
5. Holding Trades
In a fluctuating market, it is more important to know when to sell a losing trade than hold it in anticipation of profits. Most new traders try to gamble their way to success by holding positions that they feel might result in profits. Trading requires years of experience and repetitive success to properly anticipate the rise and fall of prices. One must know that even after years of trading, losses in forex are common. Knowing when to exit the market is an essential quality of a seasoned forex trader.
While leverage is one of the beneficial features in forex, gambling can often make it one of the common causes of additional losses. Leverage in simple words is the amount of funds you can borrow from the market in case you exhaust you personal funds. It allows the traders to buy even when they lack substantial capital to trade. Nevertheless, it also puts a higher amount of money at risk as you use the capital borrowed from the market. Unplanned forex gambling with leverage can only result in losses and debt creation.
At a first glance, it is often hard to differentiate between trading and gambling in a forex market and is quiet common for newbies to get confused between the two. The abovementioned points are not just mere differences between gambling and trading but are also guidelines about what to avoid in forex trading.
Luke Peters is an avid reader and writer of topics related to management, trading, finance and stock exchange. He is also an active forex trader on various forex trading platforms like cornertrader.ch and spends his free time trading in forex.