I was chatting to a trader yesterday who said to me that “in Forex trading, just as gambling, the house always wins.”
I agree. In fact, I support that statement whole-heartedly. The house does always win. Well not always. I think the statement could be improved to say, the house always wins, eventually.
Let’s consider the gambling business for a minute, and let’s just look at games that are based on ‘pure luck’ like pulling the arm on a slot machine. A gambler walks into the casino with limited funds and hopes to hit it big and get lucky. He hopes to be that guy who walks out with a cool million.
Every now and then, someone does just that and leaves with a fortune. However, every single day, all day, week in, week out, the other 99.9999% of gamblers lose. The might lose a lot, they might lose a little. They might win a little too – encouraging them to come back another day and give it all back.
The casino knows that every so often, it has to pay some big money out to someone. It’s not worried though, because every day it’s pulling in thousands and thousands of ‘small’ amounts. Those ‘small’ amounts add up…and if you’re curious as to whether our casinos are profitable, why not take a walk around one and make up your own mind?
Trading is exactly the same. If you approach trading like a gambler, you’ll eventually lose out to the house.
You need to become the house.
So how do you go from gambler, to owning the house?
You may think that the answer is capital. Casino’s have capital, that’s true, but that’s not what keeps them in business and it’s also not the thing you need to become the house in your trading.
To answer this question, let’s consider what the trader who approaches the markets like a gambler, is doing.
This trader is looking to hit it big in the markets as quickly as possible. He is risking huge amounts, hoping for a massive pay-off. This trader has never heard of “expectancy” and doesn’t have the patience to wait for great trades to setup or play out. His trading career is short lived and his trade history is a series of blown accounts. This trader also tends to focus on his win-rate and aims to win 80-90% of the time.
This trader has confidence in his system. He knows his system’s expectancy and he is disciplined in his risk management. He has a long-term future trading.
The key here is “expectancy”. Casinos have a positive expectancy. They expect to make money in the long-run. The trader who gambles has no idea what this means. The trader who trades like the casino is all about expectancy.
Here is the not-so-secret expectancy formula:
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
You’ll notice that your win-rate is not enough. You also need to know how big your winners and losers are.
Let’s plug in some numbers.
Win-rate: 65.2% (probability of a win is then 0.652)
Average winner: $113
Average loser: $100
E = (0.652 * 113) – (0.348 * 100)
E = $39.12
The average amount we expect to win with this system is $39.12.
Average winner: $400
Average loser: $80
E = (0.3 * 400) – (0.7 * 80)
E = $64
The average amount we expect to win with this system is $64.
So system 2 has a worse win-rate than system 1, but expects to make more money. It’s not all about the win-rate.
Which system would you choose to trade?
(If you answered “both of them”, you’re thinking like the house. My work is done).
If you don’t know what your expectancy is, if you don’t have a system and if you’re still trading like a gambler I want to encourage you to make that shift right now. You have to approach your trading like the house, because the house always wins. Eventually.
Come and trade the Samurai Scrooge with me. We’ll cover:
1. Getting started
a.Join the live trade room
b.Overview of the Samurai Scrooge course
2. Important trading concepts
a.Trend vs. swing trading
b.Mechanical vs. discretionary trading
e.Money management concepts
f.Letting the system do the work
3. Let’s setup our charts
4. Entry and Exit rules
a.Long trade rules
b.Short trade rules
c.Markets we’re going to trade
5. Approach risk like a Samurai
b.Limiting market exposure
6. Paper trades that we will not skip
a.We’re journaling them too
7. Embracing the suck
8. You get a whip and I get a saw, honey!
9. Our first live trade
10. Making the Samurai Scrooge your own
All you need is a live, funded One Financial Markets trading account.
Just ask me any questions about the course, including how to join and I’ll get back to you ASAP.