What Forex Traders Can Learn From Betting Games

Forex and gambling are different, but they both involve risks. Learn how parts of certain strategies overlap.
What Forex Traders Can Learn From Betting Games

Forex trading involves taking calculated risks, much like gambling. To improve your risk-taking strategies when trading currencies, you might like to explore the relevance of gambling in betting games to trading forex. It turns out that some strategies used in games like coin tosses, poker, blackjack and roulette can also apply to trading currencies. 

You should also understand where the key differences between these risk-taking disciplines lie, and why forex traders should think more like a prudent gambler that relies on assessing the odds of winning on a trade instead of trying to assess the economics of the currency pair they are considering trading. 

The Coin Flip Compared to Forex Trading

One of the oldest and most basic games of chance is the coin flip or toss. Just like in the forex market where you trade pairs of currencies that each have complex fundamental situations, the result of a coin toss involves many factors.

These include the initial position, force of the toss, gravity, humidity, number of rotations, etc. Similar to when you are analyzing the exchange rate of a currency pair, if you have precise information on all the variables affecting the coin toss, an accurate assessment of the results of the toss could theoretically be attained.

Furthermore, if you looked solely at the force of the toss, for example, you would probably not get a precise determination of the result, although knowing two or more factors might increase the accuracy of your prediction. Predicting exchange rates has many parallels to predicting the result of a coin toss, which argues for knowing and assessing as many key factors as possible that would contribute to the rate’s rise or fall.

By using a probability model and fundamental information about the currency pair when trading forex, a more accurate prediction can be made about the likelihood of a rally or a selloff in its exchange rate. For example, using a stacked coin is similar to trading in a currency pair that is trending. The odds of a movement in favor of the trend are typically greater than moves against the trend. As the old trader’s adage goes, “The trend is your friend” in such markets.

💡 Important tip: Be sure you learn forex — meaning all the different aspects — before jumping into this risky, and sometimes unregulated, market.

How Trading Forex Relates to Poker

Poker is another probability based game that relates especially well to trading forex since you play against other players in both arenas. Poker played against other people can be lucrative if you have excellent discipline, patience and skill, especially if you have either a large inheritance or another source of income to fund your gaming with. That is analogous to having better odds of succeeding as a forex trader if you have deep pockets and do not risk most of your available trading capital at one time.

Additional similarities between poker and trading forex consist of the risk of losing money, the need for prudent money and risk management, and being able to calculate relative value in an imperfect environment while controlling your emotions.

Applying these principles can be simpler with less variance in poker than with trading currencies. Also, poker does not rely on external influences and has no supply/demand variable like trading forex does. Furthermore, unlike poker, trading forex prudently requires that proper market research and analysis be conducted before making a transaction. Regardless of whether the forex analysis conducted is technical or fundamental, without performing sufficient research to assess the odds of winning, trading forex becomes little more than gambling on a coin toss.

The prudent choice of opponents in poker is another important element of success as a skilled poker player, since you gain an edge by choosing weaker players. This does not really have a parallel in the forex trading arena since you trade against a variety of other market participants you cannot select. You can, however, still copy winning traders using a social trading platform or use a good trading algorithm with an established track record to improve your odds of profiting from your forex market bets.

Trading Forex Versus Playing Blackjack

Blackjack is a popular casino game that shares a number of parallels with trading financial markets, which is the reason that many talented blackjack players become traders after being banned by casinos. Some well-known blackjack players who have become successful traders include Ed Thorp and Blair Hull. Another is Bob Bright, who is also a world-class poker player.

Because playing blackjack and trading currencies both require you to develop knowledge and discipline, the transition from blackjack to forex trading with the top brokers can be quite easy for many proficient players. Good mathematical skills and a solid base of knowledge are required in both trading and blackjack to make quick and sound risk-taking decisions.

Furthermore, success in both arenas requires mitigating risk to avoid losing money. In blackjack, “basic strategy” is employed to even the odds with the house, while learning to count cards tips the probability of winning slightly in the player’s favor. 

A similar betting strategy used in blackjack can also be employed in trading forex if you use prudent position-sizing and money management techniques. These give you the ability to absorb a string of losses without going bust, and wager more money when the odds favor increasing your bet.

The most important element in forex trading, however, consists of having and executing a sound forex trading plan developed after first educating yourself thoroughly about the market. Keep in mind that having any trading plan is probably better than having no plan at all.

Blackjack players typically plan their bets by adhering to the basic strategy they have learned. They also generally use a technique for counting the deck, which could be a single deck or a set of five decks contained in a “shoe” that is commonly used in casinos.

If the forex trader or gambler relies exclusively on luck, a good chance exists that their time at the tables or in the market could be short-lived, since their good luck will eventually run out at some point. In blackjack, as in trading, a plan ought to be followed in a disciplined manner to mitigate losses and keep emotions at bay by sticking to the strategy.

With respect to determining the potential value of a bet and how much to stake, blackjack players need to know what cards have already come out of the deck to determine what cards remain to be played. The current card count alerts the gambler to an increased likelihood of a blackjack, which in turn leads them to increase the size of their bet.

In trading currencies, spotting value means getting information about a currency pair that suggests an increased chance of its exchange rate moving in a particular direction. Knowing when to get into the market and take risks or when to stay out and “sit on your hands” are therefore key elements to success in both forex trading and blackjack.

Trading Forex Compared to Roulette

Roulette is a popular game of chance played at many casinos that involves a ball being dropped onto a revolving wheel with numbered compartments alternating black and red. Players bet on which number or color the ball will eventually come to rest on. The primary similarities between trading forex and roulette consist of betting on a forecast for a profit, as well as the fact that both trading and roulette have been perceived to have patterns.

Furthermore, the simple red/black bet in roulette is quite similar to trading a binary option where you gain a fixed payout on one side of the strike price if your market view is correct, or you lose a fixed premium on the other side of the strike if your view is wrong.

Using technical analysis to find chart patterns in the forex market could also be akin to finding a roulette wheel with a pattern bias. Performing fundamental analysis to assess the probability of a rise or fall in an exchange rate could also be compared to the probability analysis typically used by seasoned gamblers when playing roulette.

Trading With Probabilities Instead of Economics

The main reason the majority of forex traders lose money when trading is that they typically approach the endeavor using an economic model versus a probability model. Since successful gambling has its basis in determining mathematical probabilities — i.e. assessing the odds of winning as accurately as possible and betting accordingly — adopting a probability model for trading currencies makes sense in most cases.

For example, many economic factors contribute to the current level of a currency pair’s exchange rate. If a forex trader could identify and quantify all of the factors involved, then an accurate prediction of its future exchange rate could be ascertained — in theory anyway. This could allow for an economic model to provide accurate exchange rate predictions, although the fact remains that many influencing factors are either unknown or not taken into account when trading currencies, and this contributes to the unpredictability of exchange rate movements.

This complexity also drives forex analysts and traders to isolate some elements that could influence exchange rates, but not all, thereby making their predictive value questionable. One such factor consists of the interest rate differential. If you simply look at the exchange rate of a currency pair as being determined by the amount of money you receive on deposits in one currency versus the other, then you might expect the currency with the lower interest yield to fall in value versus the currency with the higher interest rate yield. 

That is not always the case, however, as any seasoned forex trader will tell you. In reality, the exchange rate of a currency pair reflects additional influences not readily apparent to many casual forex market participants. These can include commercial supply and demand factors, central bank interventions, and the expectations of professional forex market participants, with the latter factor being arguably the most important valuation element.

Since so many economic factors that determine exchange rate levels remain unknown to the average retail trader, a better method can involve looking at probabilities instead. By focusing on taking forex trades with higher estimated odds of winning and using sound money management principles as part of an overall trading strategy, much like a prudent gambler does, a disciplined currency trader (even those who are still combing through everything they can to learn forex trading for beginners) can significantly improve their chances of achieving consistent profitability.

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