People go to Casino for making money but most of the time they lose money. Why people lose money in Casino. Do you ever think about that? Because Casino always sets all betting in their favor. In here I have explained how a Professional Trader always makes money compare to Casino.
Trading forex is far better than playing roulette in the casino. Playing in the casino is gambling or based on luck. You may win for short-term based on luck but luck does not last forever. So players will eventually lose money that they have. But who always makes money at the end. The answer is Casino. I am sure you hard the phrase ‘’The house always wins’’. So Casino always wins, that is why Casino always offer free food and drinks. That means the more people they play the more money Casino make. Now the question is how do Casino guaranteed that they make money at the end?
Actually, Casino always read the all the games that they have and they have such a statistical edge over the market where Casino has positive expectancy but players have negative expectancy.
Let’s Calculate what happens with ROULETTE in Casino.
In the casino, if you play roulette how much will be your % of winning? Simple answer, Casino win 52.7%, and Players win 47.3%. So Casino’s Statistical Edge is 52.7 – 47.3 = 5.4%.
Let’s clear it out. In Roulette, there are 18 red numbers and 18 Black numbers and 2 green numbers.
Now, if you play on black numbers or red numbers, what is your chance of winning?
Total numbers = 18 red + 18 Black + 2 Green = 38 numbers, 2 Green are in favor of casino.
Your chance of winning is 18/38 = 47.3 %
Casino chance of winning is 20/38 = 52.7%
So Casino’s Statistical Edge is 52.7 – 47.3 = 5.4%. So more people play the more money Casino make. Very simple.
But in forex trading, a trader makes money more than a casino.
90% of people lose money in forex trading as because they DO NOT have plan and strategy like Casino. They trade forex based on rumor, based on emotion, based on opinion, based on tips and so on.
A professional trader always makes money by the end of the day because they read the market and gather all information on currency pairs. Most traders buy or sell on currency pairs (USD/JPY) on basis of 50 – 50 chance. As a professional trader, we study the market and we look for Price Action Patterns or it called technical analysis. Finally, by applying this Price Action Pattern that is repeatable, we enter in the market. I mean, we buy or sell any pair when the STATISTICAL EDGE is in our favors.
In the picture above, it is an example of up-trend of a currency pair. When a professional trader sees this kind of up-trend, s/he should think that it will go up at third support level. But it is not 100% guaranteed. It may go down. But normally it this case, the market will follow the trend at least while. Therefore, if we buy at third Support level or sell at the third Resistance level that will be right as we follow the market. But It may reverse.
Let’s say, we Buy at third support level from the bottom. So the winning % of this trade may be 60 – 40 or 50 – 50.
Lets do the math:
If the winning % of this trade is 60 – 40, that means your STATISTICAL EDGE is (60-40) = 20%, which is better than the casino that we discussed earlier.
If the winning % of this trade is 50 – 50, then STATISTICAL EDGE is (50-50) = 0%, which is better than casino as because we are not losing any money. But a professional trader always make money by the end of the day. How? let me explain it by simple math.
Before that, you need to know, what is Stop Loss and Take Profit in terms of trading.
Stop loss is a buy or sell order which gets triggered automatically, once the stock reaches a certain price. The aim here is to limit the loss on a security (buy or sell) position.
A take profit is the amount of money you intend to make in a trade. In your order, you specify a price at which you will close your trade. The take profit is also often called "profit target".
Let’s resume the math. If the winning % of this trade is 50 – 50, what may happen?
So let’s say you are going for 100 trades and each value of pip is $1. You will earn or lose $1 for every movement of each pip. Now, you go for short / sell, which is your entry level, of USD/JPY at 107.37. That means your market analysis says that USD/JPY will go down. Therefore, you set Stop loss at 107.35 and Take Profit at 107.41. What will be your winning or losing ratio? Your ratio will be 4:2 means you will make $4 profit associated with $2 lose.
Result: You win 50 trades out of 100, so you will make 50$4 = $200 and you lose 50 trades out of 100, so your loss will be 50$2 = $100. Therefore your overall profit will be $200 - $100 = $100, in terms of 50-50 win and lose situation.
You do the math in terms of, If the winning % of this trade is 60 – 40.
See you next Lesson on Basics of Forex. Take Care.