Forex and Casino
In the Internet there are many articles, in which working at Forex is equated to gambling in the casino, and in particular, to roulette. The authors of these articles bring out different proves, bring forward mathematical extracts from the theory of probability, often even not realizing its sense. In this chapter we will try to destroy a myth of Forex belonging to gambling games.
A roulette game is as old as time. It can be easily named one of the genius inventions of the mankind. The roulette structure and playing rules are really simple. But behind the visible simplicity of winning, the mathematical laws are covered, which bring milliards of dollars profit per year to gambling establishments; and makes millions of luck hunters bankrupts every year. Let us try to understand the roulette mechanism and realize, why it is not possible to get a stable income playing it.
In the theory of probability, the fundamental are two core notions: the event and the probability of the event’s occurrence. Anything can be understood as an “event”. A sunny day after a number of cloudy ones, a strike of workers at the factory, a casual overrunning an old friend in the street, an accident on the road, a flight delay for reason of technical problems with the plane, these are all events, which happen with a certain part of probability.
Among great amount of events, there are those, which can occur simultaneously (then we talk about a complex event), and those, which are mutually exclusive and can never happen at one and the same moment. For example, you can go out and meet your long-time friend not far from the factory, where a strike of workers takes place on a bright sunny day. In this example, three events happened at one time. But such events, as a rainy day and a sunny day, are mutually exclusive and can never happen at the same time. It is easy to understand that a probability of the occurrence of a complex event is lesser, than of a single event, which is included in a complex one. As for the occurrence of a complex event, a number of factors should happen together. Let us consider another classical example - dice throwing. A dice has six cube faces, on each side, there is a number applied in the form of pips (from 1 to 6 pips). The number, which comes out, is an event. Only one number can occur at a time. Thus, there are only six variants of the event in the example with a dice, and all of them exclude one another.
It is vivid, that when we are throwing the dice, one number always comes out. It means, the probability, that a particular number will occur, can be considered as1, or 100%. What is the probability of a certain number occurrence, for example, 1 or 5? Are these probabilities equalized? We will try to sort it out.
In the theory of probability, there is a notion of frequency distribution. It is a probability function of the occurrence of the event from the event. We will not go into details, and will just say, that a number outcome on a dice, has a random probability distribution, that is, the probability of any number outcome is equal. This happens, because a dice cube has a regular shape and a uniform density. Thus, as there are only 6 numbers on a cube, a probability of a certain number occurrence equals to 100 / 6 = 16.6666…%.
The following important step in mastering a theory of probability is the law of large numbers. In our example with a dice, its sense is, that if we throw the dice for a great many times, a single number will occur proportionally to the probability of the occurrence of its event. And, as all six numbers have the same probability of occurrence, every number comes out for the equal number of times. Besides, the more times a dice is thrown, the lesser is the measure of inaccuracy of this statement. The inaccuracy tends to zero with a quantity of throws verging to infinity. It comes out, that if we throw the dice for 1, 000, 000 times, every number will occur approximately 166 667 times with a certain inaccuracy.
What if the distribution frequency is not equal? Suppose that we have covered one cube face with lead, having changed by this operation its density distribution. The probability of number 1 occurrence now is equal to 50%, and the probability of the occurrence of the left five numbers has remained equal to 12.5%. Now, if we throw the dice for 1 000 000, number 1 will come out for about 500 000 times and other numbers will come out for about 125 000 each. Let us go back to the roulette game. There are 37 cells on a table field: numbers from 1 to 36 and a zero. The frequency distribution of a number outcome in a roulette game, like in the situation with a dice, is equable. That means that the probability of the outcome of a single number in the roulette is equal and amounts to 1/37. The gain which is paid to the winner by the casino is equal to 1:36. Thus, for every ruble bet, with a probability of 1/37, we will get 36 rubles.
You understood everything correctly; the minus in the received formula denotes the loss and the gain in the casino. It does not matter, on what numbers you will bet. Every time the same or different, the formula does not change. The more is the value of X, the less is the measure of inaccuracy of the formula. When the value of X is small, the inaccuracy can be significant, thus, if you came to a casino, made a few bets, won, went away and never came back, the casino sustained losses from you. But having won once, hardly anyone can stop; the roulette game becomes a lifestyle. A person comes back with a hope of winning again, and starts to play constantly. The number of played games increases, the inaccuracy of the formula lowers and in the end, a person loses. Even if a certain person after a big win at the casino will never come back, anyway, other people will, who are hunting for luck; and gambling business will profit.
There is one more comment. According to the formula it comes out, that having played 1000 games on 1 ruble, the player loses only 1/37 part, that is, around 27 rubles. At such speed, it is possible to stay on the float, getting pleasure form the game. In real life, hardly anyone bets 1 ruble in roulette game, a person is wrecked by his own hazard. Making risky high bets, one comes to the situation, when he has not enough funds to recoup. And this brings to bankruptcy- the lack of funds for further play- after-game. If all players were billionaires, they could be playing for a long time, losing only 1/37 part of their bets. 1/37 is approximately 2.73%. This exactly is the advantage of a casino over a player. In the American variant of the roulette game (unlike in European) there are two zeros on the table field (0 and 00), in such roulette, the lead of the casino over a player is 2/38- which is almost 5.26%, and stiffens the conditions of the game even more.
Of course, in the roulette it is possible to stake not only on one number, but also on 2 or 4 or the whole sequence of numbers at the same time. However, at such bets the win is lowered proportionally, i.e. the formula remains the same. A casino is always winning, and its anticipated profit can be calculated mathematically. With European roulette, it is equal to 2.73% from all bets of all players, in American roulette it is 5.26%. For other games, there also exist formulas of the probability calculation, and correspondingly, the expected profit of a gambling house. The real profit of the casino differs from the expected, as people simply have no funds for recoupment, because they are gambling everything away.
That is why it is impossible to get a steady income at the casino. But at Forex, the situation is completely different. Here, we also have events (increase or fall of the currency rate) and the probability of its occurrence. But the distribution of these probabilities is irregular, and a strict mathematical formula cannot be received. Moreover, these probabilities can be forecasted, and if the analysis instruments, such as technical analysis and fundamental analysis, are used properly, it is possible to get a regular income.
Why can the currency rates behavior, which seems chaotic at first sight, be forecasted, will be discussed in other parts of the site. Now we will just say that the currency rates’ movement is caused by people (brokers, dealers, the Internet traders). If the majority of them are buying currency (a bullish sentiment dominates), the rate is increasing. If the majority of them are selling (or the bearish trend prevails), its rate is down falling. If you can determine the tendency of the market timely and be on the majority part, you will get a steady profit. As most part of traders at Forex, for the estimation of a market tendency, uses similar analysis instruments, all you need to do, is to follow the majority. Here we should make a little remark. The majority at Forex, in this situation, is determined not by the number of traders, but by the volume of the operations conducted by them. Significant transactions at the currency market are made only by experienced traders- the dealers of big investment companies, investment funds and banks. They are people with special education, year’s long experience and high level of knowledge. In order to trade successfully at Forex, you should imitate the behavior pattern of these people at the currency market, and this is impossible, without correspondent education.
That is why, before start working at Forex, it is needed to study this market thoroughly, as well as the instruments, which are used by professionals for the forecast of its behavior. This is the only possible way to success!
Thus, you see that working at Forex has little in common with a roulette game. Keep reading the information on the website and you will learn much, which means, that in course of time you will get steady income at Forex. The amount of this income will depend exceptionally on you! Your success is entirely in your hands!