Saturday December 9, 2017 - 11:50:51 GMT
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What’s the difference between a trader and a gambler?
Anyone who has spent any time around serial investors or professional traders will have heard from time to time the exasperated exclamation of: “I might as well put it on a horse,” as a particular transaction heads south at the most inopportune moment. It sounds like a throwaway comment, but it raises a genuine question: Is there really much difference between Forex trading and gambling?
Gambling on alternative investments
From rare coins to Bitcoins, investors the world over have been looking for alternative strategies ever since the economic events of 2008. Over the same period, the world has become far more savvy on the subject of gambling due online casinos surging in popularity. If you join Casumo casino today, could that put you in good stead to trade successfully in Forex tomorrow? With the same mathematical principles in play, the somewhat surprising answer is that it could.
Probabilities, odds and the house edge
The casual gambler will be familiar with all three of the above terms, while the professional gambler lives by them. The three are interconnected – the probability of winning a coin toss is even money, or 1/1. A casino might pay out 95p to a pound, so the odds on offer are 19/20. The house edge is the delta between the two, or in this case five percent.
A professional gambler will not be betting on the flip of a coin, however. He will want something where he can use skill and knowledge to decrease the house edge and therefore try to beat the house. This might mean playing a game like blackjack or poker, where strategy can practically eliminate the house edge for the best players. Or it might mean wagering on a sports event, such as a horse race or football match, where he can study the form and make an informed prediction about the outcome.
Applying gambling principles to Forex trading
So far so good, but when we look at the world of Forex, we see exactly the same thing. The amateur trader knows there are trends and patterns at work, but has little knowledge on how to use them. They will be reluctant to admit it, but their trades are typically of the “hope for the best” variety. Conceptually, this is really not so different from placing your chips on red at the roulette wheel. Or for those with a little knowledge, it might be compared to putting £100 on Everton to beat Bournemouth in the Premier League on the basis of recent form.
Professional traders, however, will tell you that they have a fool proof way of “beating the house,” and making every trade a winner through seeking out and exploiting confluence factors.
And here we come to this a fundamental difference between a casino and trading. The best blackjack player can reduce the house edge from around four percent to less than one percent through strategic play. It is impressive, but in the long run, the house always wins. The strategy of analysing confluence factors can have the effect of shifting the long-term odds into the favour of the trader.
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