Considering conventional economic rules, casinos shouldn’t exist. However, nearly all games in these gambling houses revolve around players giving more and getting less on average, as well as in bookmaking. There is a minuscule likelihood of hitting the jackpot based on the mathematical edge casinos have over players.
This might sound irrelevant to the world of trading forex. Though in truth, we can draw some interesting parallels between the two. Traders deal with some mathematics when it comes to risk and reward and need to develop an edge to tilt odds in their favor, just as casinos do.
It’s a popular statement that the ‘house always wins.’ Regardless of the casino games, they are all designed to provide a statistical advantage to the ‘house’ over time. These percentages will vary in roulette, blackjack, poker, etc.
While casinos can fall behind on certain nights because of the variability, they will technically always average out to their statistical odds in the long run. Humans are naturally inclined to prefer low-probability, high-reward bets because of the appeal of winning big.
Casinos understand this premise and have developed their entire model around it. As with any business, even when money leaves the company, more should be coming in.
Developing an edge
One of the keys to casinos being constantly profitable is how they’ve developed an edge in all the games they offer. The concept of an edge in forex is often spoken about in trading communities. An edge defines a trader’s technical and numerical dominance and is one of the most important things to have.
In short, it is the advantage one can capitalize with over other traders repeatedly in the markets. Traders look to exploit specific patterns and market structures that they believe can happen enough times to profit. This is essentially the foundation of their trading system.
So, how does a trader know their edge works? They perform rigorous back-testing and forward-testing through sufficient simulations. Similarly, a casino will use a myriad of prediction, gambling, and probabilistic models for each game and structure how players will play their bets in ways benefiting them.
The law of large numbers
At its core, trading forex is a 50% probability; price can go in two directions, up or down. The challenge is as one takes more positions over time, these statistics will vary either in favor or against the trader.
This phenomenon is referred to as the law of large numbers, a probability theory describing how substantial trials of an experiment bring it closer to its expected average. Having an edge is paramount. However, for traders to see it play out, they need to execute many positions over a long period.
Individual or one-off trades don’t matter, but it’s about a large sample size where someone can see their statistical advantage prevail. Their edge presents them with a positive expectancy. Therefore, losing streaks may occur from time to time, but the proper risk to reward ensures traders can compensate for them.
In casinos, it’s not uncommon for players to win ten or more hands in a row in blackjack on a given day. The casino’s edge ensures that they will come out ahead no matter how many hands are played.
Let’s also consider roulette. In this game, we have 36 numbers with red and black colors. This presents 50-50 odds on the surface, though casinos cleverly add the green zero number. Therefore, the probability becomes 47-53, where the players can only win 47 bets while the casino wins 53.
Overall, having an edge is about the risk to reward. Fortunately, forex traders can consistently produce reward outcomes that are at least twice the amount of money they put down.
Money and risk management
Like forex, the casino business revolves around managing risk, the elements of uncertainty. No trader in the world can consistently predict the outcomes of every trade. To mitigate this inherent contingency, traders place limits on how much they are prepared to lose over any given period.
We can liken this with how casinos have table limits. Although we’ve established the various statistical advantages they have in games, it’s still possible for a player to bet large amounts, which can potentially require them to pay out massively.
By having some restrictions, they ensure their downside is capped. With forex trading, it’s about managing any potential drawdown or risk of ruin. Running a casino, like a forex trading, involves a number of moving parts. These businesses have various systems to attract, incentivize, and retain customers, etc.
In forex, traders employ a similar philosophy of research and development by strategically scaling up their accounts, adapting to the ever-changing market conditions, and creating new strategies in different markets.
Despite acquiring all the necessary analytical skills, trading forex is purely a numbers game. It might seem impossible to profit from the markets with the amount of uncertainty and little control present to the uninformed person.
Fortunately, it is feasible once traders gain a deep understanding of the various risk-to-reward parameters. Here’s a summary of what we can learn from casinos to trade forex prosperously:
- Having a mathematical edge is the foundation of consistent profitability. Knowing this is about exploiting something inherent in the markets that produce a positive expectancy even with random, negative short-term results. Combining a certain known win rate and reward factor is the key.
- Following the previous point, the law of large numbers is essential for traders to really see their edge play out. Losing streaks are inevitable, though if each position nets more than it loses, these should easily be mitigated.
- Lastly, knowing all the above information is still not sufficient without adequate money management. Hence, traders will set drawdown limits to ensure they don’t blow their accounts.