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The probability of busting your account is almost 100%, for the gamblers...

Discussion in 'Forex Articles' started by WaveRider, Apr 17, 2012.

  1. WaveRider

    WaveRider Sergeant

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    Forex shouldn't be like gambling, but remember some people gamble for a living and make a lot of money doing it. So how to improve your game?

    Here is some sobering math about your account, and some advice to stay solvent.

    Assuming you had a fair 50/50 chance of winning all your trades or getting the stop loss hit:

    Q: How likely are you to have a 7 trade losing streak?
    A: Very likely. In 100 trades, the odds you will have 7 consecutive losers is 17.23%.
    100 trades can be a day or two for the over-traders, or few weeks for a typical EA, or a year or two for the pros. (I doubt many successful manual traders trade that many times per year.) As the total number of trades goes up, this percentage goes up exponentially.

    source: Probability - Coins - Ask the Wizard - Wizard of Odds

    The chances of NOT getting a 6 trade streak, win or loss, in 200 trades is only 3.47%, assuming they were all 50/50 trades.

    source: http://wizardofodds.com/image/ask-the-wizard/streaks.pdf


    Theoretically that could be 7 losses out of the first 7 trades. That's not likely but you could hit the lottery and lose everything. Many have lost everything in a lot fewer than 7 trades.

    Can your trading plan take a 7 trade loss streak and you still have the funds (and heart) to trade?

    TIP 1: Trade small relative to account size.

    Every successful professional trader can take 7 losses in a row. More even. One successful trader said he traded so small it would have been nearly impossible to bust the account. (Nice when you're that well funded.)A 25% draw down can happen to a well respected and overall very successful trader. You are very unlikely to have 11 or 12 losses in a row so make trade sizes small enough to put you in that bracket of safety. On the other hand, a losing streak of 5 or 6 over a relatively short career is near 100% certain, thus the title of the article.

    Tip 2: To improve the odds, get into a trend.

    Stay out of low probability time periods. In black jack, staying out when the odds are against you is called wonging, named after Stanford Wong a.k.a. John Fergusson. A wonger will watch the table, counting cards but not playing, during the low and negative count. He'll jump in when the count is high, meaning the likelihood of having a face card is very high. This drastically changes the house advantage to being a player advantage. He steps out of the game again when the count is low because the house has the advantage. This is how the MIT teams (there were more than one) made boat loads as depicted in the movie "21". They had team mates watch several tables and the wonger came in and made a ton of money on the hottest one.
    In blackjack, if the player is playing perfectly and with standard Vegas rules, the house advantage is only about 0.5%, about the best in all of gambling. But math doesn't lie and this 0.5% makes buckets of dough for casino. It's compound winnings. But if the player stays out during the statistically bad times, he's evaded the rules of probability, basically letting the other players on the table eat the low odds time periods. He will always have a much higher chance of winning and compounding the winnings.

    How does a Forex trader wong the market? Stay out until there is statistically higher probability of success. Get into an established trend. How to define a trend? Sive and Joe Dinapoli define a trend as the price closing above or below the 25x5 SMA three or more bars on the 4 hour or greater charts, if I remember right. Others say if the price is above the 200 EMA for a certain number of bars. It doesn't really matter. There are a lot of ways to define a trend, but one thing is sure, a ranging choppy market is statistically bad. It's where your broker makes money. Grid trading is supposedly for ranging markets but I don't understand how they handle it when the market stops ranging and you have several open trades that move against you. Trends are common but not every day. Wong until the count is in your favor.

    So don't gamble in Forex, but if you do, gamble like a pro.
     
  2. Pharaoh

    Pharaoh Colonel

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    Now if only we could convince new traders in all markets to follow this advice. Some people complain that leverage in forex causes losses. Over-leveraging trades speeds up losses, but risking too much on a single trade will lead to blowing your account whether your leverage is 1:1 or 1000:1.
     
  3. WaveRider

    WaveRider Sergeant

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    I have a theory.
    During another get rich quick lifetime some years ago, I got Ron Legrand's real estate course. It was a CD set of his 3-day weekend seminar. It's really very good. It is an actual full business plan with flyers, business cards, phone scripts, contracts that favor the investor depending on if he is buying or selling a property. And it works. For those in the USA, they'll recognize the signs that Say "We Buy Houses Cash". That's his system. One thing he said in there made me think. It was near the very beginning of this course he said; "I wish all of you would make a go of this business and be successful but the truth is most of you won't. Most won't have the drive or dedication. I wish that weren't the case but it's the sad truth." During the course, he actually bought properties with the class and showed them how to do rehabs. He showed them it worked, but most never follow through.
    My theory is 95% won't trade right no matter who teaches them, who mentors them, how many reminders they get. Also, mathematically, that is the only way the market can work. There has to be more losers than winners for the 5% to make a profit. I wish it weren't true. All I can worry about ultimately is me and hope I follow through.
     
  4. ewan_savage

    ewan_savage Private, 1st Class

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    Hm.. interesting, makes sense. Good tips, I'd say anybody would have to assume (or at least agree) that trading is not like a game of blackjack or poker... I don't know, I don't play cards so maybe I'm just talking a bunch of nonsense.. that's a whole rabbit hole anyway, whether trading is gambling or not.
     
  5. Pharaoh

    Pharaoh Colonel

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    Then again, a lot of people made a lot of money in real estate in the USA - until 2008. Foolish me - I used my extra money to pay down my mortgage early. I had no idea that the government was going to step in and start helping people who bought way more than they could afford. Now if you're house is getting to the edge of forclosure, you can sell at a loss and still walk away with cash.

    Maybe those 95% of losing forex traders should ask for bailout money.
     
  6. RahmanSL

    RahmanSL Major

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    "...Foolish me - I used my extra money to pay down my mortgage early."

    hmmm...this is indeed news to me 'cause here I am believing "Pharaohs" reside in grand & opulent palaces complete with well stocked harem and an army of slaves catering to his every wishes and fancies!
    Guess in these turbulent times, even Pharaohs have to pay mortgages....and taxes too! :p


    There is an old thread somewhere here at the FPA asking whether trading the forex is similar to gambling.
    In my most humble and super unbiased opinion, the answer is a most definite and resounding "YES" coz, as in gambling, trading the forex involve a high degree of risks & speculation on expected returns...albeit, as seasoned traders would like to claimed, calculated risks (through various technical & fundamental analysis), but nonetheless still real risks of losing real money.

    As in gambling or any form of speculation, if you trade the forex mindlessly and without any clue as to what the hell you are doing, then you will most certainly 101% loss all your money.
     
  7. WaveRider

    WaveRider Sergeant

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    Can I apply for a friggin Forex stimulus?
    I'm glad I'm not a Pharaoh. Unlike a PS3, I could never explain the harem to the wife as both recreational and functional.
    I'm pretty sure after reading so much about all this forex biz, most people think of it like Vegas. Roll the dice for a chance to win big. Very few really see it as a business. Ironically, pro gamblers see gambling as a business. Poker, probably the most famous of games currently, is the one game that lets you best other people, with no house advantage, since often the house isn't playing. They keep some commision for hosting. Maybe like a spread?
     
  8. Pharaoh

    Pharaoh Colonel

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    I just had to tell my #1 wife that the harem is an essential part of my daily exercise routine. :)

    Going into a casino and having a rationally worked out plan to tilt the odds in one's favor changes the trip from wild gambling to something at least resembling a business idea. If the plan is truly well calculated, it could indeed be a real business idea - but if it involves counting cards at blackjack eventually the casino will act like a forex bucket shop and throw you out. The house never likes to lose too much.

    Sadly, most traders in most markets have no plan and are just looking for 1 big score. People like that should really stick to buying a lottety ticket once a week. That will let them dream of instant riches without throwing too much money away.
     
  9. WaveRider

    WaveRider Sergeant

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    Pro's gamblers don't gamble

    On the gambling thing, pro gamblers treat it as a business and don't play the odds because they will lose that way. There is no such thing as luck so they don't rely on it. They wong the poor odds, letting others lose, play the better odds, taking the winnings. Or they play other people, where there is no statistical advantage either way. For those games, the best people-reader wins.
     
  10. AsstModerator

    AsstModerator FPA Forums and Reviews Admin

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    I feel lucky. I'm betting everything on red. :)
     

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