An Edge And Nothing More

Filed under: Learn Forex Trading |

Screen shot 2013-07-23 at 11.15.32How does a casino make money? They have an edge. In roulette, a player has a 1 in 38 chance of winning, but the house only pays out 35 times the stake for any winners. In the short term, anything can happen. But as long as the house is adequately funded to handle a string of winners, then in the long-term, they will come out on top.

 

It is the same with bookies. Let’s say there is a four horse race, and each horse has an equal chance of winning. If this is so, then the odds of each house winning should be 3-1. If you put a $1 bet on every horse, you will come out at breakeven. However, the bookie creates an ‘over round’ to make sure that they get a profit, and marks the odds at 8/3 for each horse. Now, if you bet $1 on each horse, you will make a loss, and the bookie will take that loss as profit.

 

There is a similar system in play within the forex markets. The broker makes a profit on the spread (the difference between the buy price and the sell price), so you need a significant edge to be profitable. However, all that you need is an edge, and if you are adequately funded, just like a casino, then over the long term, you should be able to ride out any short-term losses, and over the long-term, be profitable.

 

However, it is important to remember that your equity curve is unlikely to go up in a straight line, and there will be natural ebbs and flows. Trading forex is a long-term game, and anything can happen in the short-term, so it is best to be prepared for that. Finding an edge is not easy, and even harder to prove, but once you have one, stick with it and see the big picture. The house never loses.

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