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Trading Vs. Gambling - Sneaky Tips For Beating Stock Market Odds
Provided By David Jenyns & Trading
Secrets Revealed
Trading is similar to gambling, but with proper strategies in place you can make money in trading unlike many forms of gambling where the odds are almost always against you. The key to success is simply to manage your risk. Money management is simply a tool to manage your risk. If you play too risky in the market, you will certainly lose in the long run. Your money management rules will prevent you from making this mistake.
Each Trade Is Independent Of Each Other
A key rule to remember in trading (and in most other forms of gambling such as roulette) is that each trade (or play) is independent of the previous. In other words, if you won in a previous trade, it has no bearing on whether you will win or lose in the next trade – it is effectively independent of one another.
A Disastrous Example
An example of where not respecting this law can end in dramatic failure can be seen in the following roulette “money management” system. There is hesitation in using the words “money management” in this example as it demonstrates how not controlling your risk or exposure to a bet (or trade) can lead to your account being wiped out completely in a few plays.
The rules (1):
1.If there are 5 reds or 5 blacks in a row, you would then bet on the opposite colour on the 6th occasion
2.If you are wrong on the 6th occasion, you would double bet and still bet on the same colour as you did on the 6th occasion (i.e. if you bet $1,000, you will place $2,000 on the next and so on)
3.You would continue to bet and double your previous stake until you win as in step 2.
The thinking behind this that after 5 reds or 5 blacks it is time for the colour to change. If it does not change on the 6th occasion, there would be a better chance of changing on the 7th occasion and so, in order to capitalise on this, you would double your bet. If you are still wrong, then it has more chance of colour change on the 8th occasion so you would place even more money on the bet and so on.
Let us see what happens if we get 9 blacks in a row using the above rules. Assume for the time being we have an account of $10,000 and we bet $1,000 on every play:
| Round |
Account Size ($) |
Amount Bet ($) |
Bet placed on … |
Outcome … |
Win / Loss |
Remaining Account Funds ($) |
| 1 |
10,000 |
1,000 |
Black |
Black |
Win |
11,000 |
| 2 |
11,000 |
1,000 |
Black |
Black |
Win |
12,000 |
| 3 |
12,000 |
1,000 |
Black |
Black |
Win |
13,000 |
| 4 |
13,000 |
1,000 |
Black |
Black |
Win |
14,000 |
| 5 |
14,000 |
1,000 |
Black |
Black |
Win |
15,000 |
| 6 |
15,000 |
1,000 |
Red |
Black |
Lose |
14,000 |
| 7 |
14,000 |
2,000 |
Red |
Black |
Lose |
12,000 |
| 8 |
12,000 |
4,000 |
Red |
Black |
Lose |
8,000 |
| 9 |
8,000 |
8,000 (all-or-nothing) |
Red |
Black |
Lose |
BROKE!! |
As can be seen in the example, the account started to make a healthy profit until round 5 and then rapidly trailed behind. By the end of round 9 you would have been broke!! You may have had more wins than losses but you still ended up losing all of your account. The reason behind this is simply that you took on too much risk with the last few trades!
A Better Example
Now, let us play with another set of rules where the amount you bet is not increasing, but is a set percentage of your account, say for example 10%.
The rules (2):
-
If there are 5 reds or 5 blacks in a row, you would then bet on the opposite colour on the 6th occasion. You will only bet a maximum of 10% of your account in any one trade
-
If you are wrong on the 6th occasion, you will bet on the opposing colour, but again you will only bet a maximum of 10% of your account size.
-
You will continue to bet a maximum of 10% of your account until you win as in step 2.
| Round |
Account Size ($) |
Amount Bet ($) (10% of Account Size) |
Bet placed on … |
Outcome … |
Win / Loss |
Remaining Account Funds ($) |
| 1 |
10,000 |
1,000 |
Black |
Black |
Win |
11,000 |
| 2 |
11,000 |
1,100 |
Black |
Black |
Win |
12,100 |
| 3 |
12,100 |
1,210 |
Black |
Black |
Win |
13,310 |
| 4 |
13,310 |
1,331 |
Black |
Black |
Win |
14,641 |
| 5 |
14,641 |
1,464 |
Black |
Black |
Win |
16,105 |
| 6 |
16,105 |
1,610 |
Red |
Black |
Lose |
14,495 |
| 7 |
14,495 |
1,449 |
Red |
Black |
Lose |
13,046 |
| 8 |
13,046 |
1,304 |
Red |
Black |
Lose |
11,742 |
| 9 |
11,742 |
1,174 |
Red |
Black |
Lose |
10,570 |
As can be seen in the table above, the system is an ultimate winner. Not only did you keep all your original capital, you made a profit of $570 as well!!
The reason for this is that you kept the amount you bet on the trade independent of the outcome of the previous result. As such, you were rewarded quite handsomely.
So How Does This Relate To Trading?
So enough about roulette – how does this relate to trading? The simple answer is that in the disastrous example, the last few bets took on too much risk an you paid the price. In the better example, you increased (or decreased) the amount you bet relative to the amount you could afford to lose if the bet went bad, and as a result, you were rewarded with a nice sum at the end.
Trading is exactly the same – a certain number of trades will go against you. The trade you placed and won previously has no bearing on the next trade you place. Your money management rules should tell you how much risk to take on and how much you should trade (i.e. position size)
As can be seen in the quite dramatic examples above, these rules are essential for any effective trading system and will help you keep out of trouble when things may appear to get bad.
This article has been extracted from
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