Let's look at gambling and speculation, in more detail and look at the difference between the two in terms of the trading arena itself and how you trade it.
Games of Chance v Games of Skill
If you go to a casino and play Roulette, Craps, Keno or Baccarat, there is nothing you can do to influence the outcome of the game and the house always has an edge – play long enough and you will lose money. There are other casino games where you can make money and Blackjack is the perfect example because you can card count.
If you card count correctly, you will be able to limit yourself to playing only when the cards coming out of the deck favour you playing. There are many famous card counters who made money longer term paying cards and many, ended up trading currency markets for profit and one of the most famous was Blair Hull, who was featured in Jack Shawager's book Market Wizards and you can read more about him and his trading methods on this site.
So to make a clear distinction between speculation and gambling, the difference is in one you can get the odds on your side and in the other - you can't. Casino games are not all games of chance, although most of them so why is currency trading, speculation rather than gambling?
Currency Trading as a Speculation
Currency trading is not gambling because it is possible to get an edge over other traders by calculating the odds and the way this is done is by studying human behaviour over the longer term and if you do, you will notice that as a crowd humans can act in a very predictable way and when they do, you can trade with the odds on your side and make profits. I am not implying you will win every trade but if you trade with the odds on your side, you will be able to gain the edge you need to win and make money, with a well thought out currency trading strategy over time.
For some reason, traders today believe that trading is different today than in the past but if you read the book, Extraordinary Popular Delusions and Madness of Crowds by Charles Mackay, you will be able to read about various examples of a boom and then a bust and the 3 he covers in great detail are:
The Mississippi Madness, the South Sea Bubble and the Tulip Mania, where human nature created financial bubbles which eventually burst. All the examples are hundreds of years ago but fast forward to today and you can see similar bubbles such as the 1987 crash and the internet stock boom and bust of the 1990s. Human nature never changes and as a crowd, human behaviour is ruled by greed and fear.
“...by the mere fact that he forms part of an organised crowd, a man descends several rungs in the ladder of civilisation. Isolated, he may be a cultivated individual; in a crowd, he is a barbarian” (Gustav Le Bon)
The above is a quote from Gustav Le Bon which comes from his classic book the Crowd written in 1899. The book is one of the most definitive studies on crowd behaviour ever written and is a must read for anyone trading currencies. When looking at currency market movement, you will see that highly predictable chart patterns are constantly created in any currency pair which are created time and time again by crowd psychology. Because human nature never changes, these chart formations which reflect human psychology will always occur, a greed, hope and fear, grip crowds and have done for centuries.
Forget about people telling you markets are more advanced today than they were – there not which can be seen in bubbles which continue to occur and always will. Human nature creates spectacular booms and busts but the markets are also giving smaller rises and falls which are a product of human emotion. In any currency pair, every day, you will see the crowd mentality at work and if you understand the mentality of the crowd, you transact trading signals for profit.
One question I often get asked is what's the difference between speculating and investing?
The answer is there is no difference. Investing sounds more grand and more respectable but there the same. Many people refer to trading stocks as investing whereas currency trading is speculation. The implication is that stocks are a “safer” form of trading but there not – the same human psychology which drives currency prices, drives stock prices and you can win in both and you can lose in both.
The Way You Trade Currencies Can Be Gambling or Speculation
Most traders despite the fact that currency trading is an investment in which you make money if you have the right attitude and psychological make-up come in a gamble. The currency trader who gambles is typically one who has done no research, got no trading education and doesn't have a well thought out trading strategy which can give him an edge. In conclusion he is not going to win as he simply doesn't know how to get the odds on his side and In many instances, traders gamble and don't even realize it which we will explore in part 2 of this article series.