As casinos and trading both work on probabilities, when you have an edge and overall positive expectancy, you are making money in a long term. You might have a streak of loosers but after many trades, the total result is positive. Thats how casinos never loose money. Why than, if you calculate risk of ruin, the more trades you base it on, the higher your probability of ruin? The risk should go down with increasing number of trades.
Its basic probability. If you have a system that gives a winner 70% of the time, the only way to erode that probability is to run very few trades. So if you only ran 10 trades, its highly likely that less than 7 would be winners: but if you ran 1000 trades, its very probable that 700 or approximately would be winners. The more trades you run, the more true the probability figure.
The same principle applies to the risk of ruin. If its only 1%, so that 1 trade in 100 would be expected to cause you ruin, then if you only ran 10 trades, it would be very very unlikely that 1 of them would cause you ruin. But if you ran 1000 trades, the probability of a ruinous trade being one of them becomes much greater.
You can only hope that by the time you reach the ruinous trade,m you have already made so much profit that you have actually withdrawn enough money from the account to live on if you should be ruined, i.e. your account is wiped out.
An expecting overall positive will make any trader lose…If they not place a stop loss order.
If you only do ten - or a hundred trades, then “normality” reigns - but with a very high number the risk of an exceptional “Black swan” run of trades becomes higher and the opportunity for a “Swissy” type event also increases.
Look at weather - in any ten days or 100 days you will get “normal weather”
However watch the weather for 1000 yearsand you will see massive floods, droughts, tidal waves - A great many of what they call “100 year events” (because they happen once in a hundred years (they think).
Watch it for a million years - you will get extinction events, an ice age or two (irrespective of any CO2 produced by man) and land being created and destroyed.
Is there actual probability of winning or loosing in forex trading? Trading is not gambling. Very experienced traders are usually making money because they know exactly the dynamics and developments on the market. Loose deals are made because of their own wrong assumptions and yes, bets sometimes.
Risk of ruin has definitely come down in the UK since ESMA regulations required clients to be given negative equity protection. So it looks like a big surprise event like the 2015 EUR/CHF crash which jumped stop-losses should not now lead to unpredictable debts.
that’s why we need study math to trade successfully. In this regards I can recommend a book from Ralph Vince called Money management. It is the math required for trading but set forth in quite comprehensible way.
Very perceptive post. Truly, that’s the reason why you can’t win a big amount of money in the casino. I gamble myself, but I do it another way. I just go to the empire777 casino online once in a month and spend a small amount of money there. Maybe someday I will win a jackpot, maybe not. But spending tons of money hoping to win back is a little insane. Everyone wants to make a lot of money out of nothing. I’m not an exception. I think it’s more wise to act like this - just don’t spend more money then you can afford at one time.
to tell you the truth, I really love math and when I had lessos of math I asked the questions about the probablity of all online casinos. Soo, I have seen how it works and omg, the probability is reaaaally low.
have you had lessons regarding gambling? lol, our teacher was more like saint than gambling man
However, it just a matter of case and your luck. to tell you the truth, I really love math and when I had lessons of math I asked the questions about the probability of all online casinos. Soo, I have seen how it works and omg, the probability is reaaaally low. However, it just a matter of case and your luck. I personally found a great Asian online casino offering a wide list of games and what I really appreciated is that you can test every game for free and then choose the most suitable. Totally worth trying!
I’ve never heard of “risk of ruin”, what does it mean?
It means the risk of wiping out your entire account usually by leaving it exposed to a massive risk incident, rather than the normal trading losses that are a product of your strategy.
So the EUR/CHF crash is an example. A trader could have been following a conventional strategy that looked safe but found themselves on the long side of EUR/CHF that morning when price dropped so low and so fast that their stop would not have been triggered. Or maybe their strategy didn’t even incorporate a stop-loss.
Its as if the airplane was flying normally and all the instruments were fine until it flew horizontally and at normal speed into a mountainside.
Risk of ruin is present in conventional strategies (100 x 2% losses will effectively wipe out any trading account) but is only an issue of the trader does not adapt their strategy to market conditions or their own behaviours.
@tommor Wait a moment. Risk of ruin means a catastrophe that just wipes out your entire account whether you USE A STOP LOSS or not? So the stoploss is 100‰ USELESS?
A stop-loss should always be used. But in circumstances like the EUR/CHF situation the market can gap past your SL, perhaps while the market is closed: if that happens, the broker will normally close your position at the first available price but of course you now have no idea where that is except that it will definitely be a loss.
It doesn’t mean losing all of your trading capital as the ruin point is based on your own personal risk tolerance.
A trader should hope for the best but should also be prepared for the best. That’s the rule.
It’s true that risk is associated with trading. But sometimes, taking risks can turn the tables for you. You better know that forex trading is all about making the right decisions at the right time. If you are not active in the market, it may overcome you and someone else will get the price you wanted.