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Be the house, not the player


TheEconomist

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Have you ever considered that a large amount of brokers work as online casinos trading against their clients and getting not only the spreads, but also their money? What makes them "play the house" in this game? Newbie traders greed and confidence? They know that the traders that make money are only the 10%, why not taking the money of the rest...

Let's think for a moment: what kind of money management do you need to have in order to see the broker as a player, while you have the house?

How to make the a large number of losses not affect you and boost up equity during small gain series?

 

Let's consider the market as a binary stream of situations that are equal (as a huge stream of 0 and 1 digits). Let the 0's be the loss situations and 1's the win situations. How not to lose to much cash? Don't play too much on each situation. Suppose you divide your capital in 256 parts, and play each part to be won or lost. That means that after a huge number of say 20 consecutive losses, you lost 20 units from 256. The broker, on the other side, what did it win? Small gains "pip wise". Now pretty many times the randomness of market will put you in win situations. A played unit that is won remains and generates a unit of profit. So now on the next trade you have available 2 units from the previous trade + 1 unit (the one allocated for the trade). If the next trade is won, it will double the played units, which will be 6. You already have 6 units and play for the next one. That means 7 units available. You win this one, thus making 14 units. If you win the next one, it will be (14+1)*2 = 30 units. After a series of 4 wins you already recovered the 20 units and made 10 as profit. Did the broker lost 30 units in just 4 trades ? Yes. Did it play stupidly trading against you ? Yes. Was it "pound foolish" ? Yes again. Of course if you lose the last trade, you lose 4 units of the original 256 making the equity. Another version of this would be not adding an unit every won trade. Once the first wins another unit, play these 2 units and so on. On the loss moment, only the original unit is lost from equity.

 

It is up to you to decide how many consecutive wons will be doubled. After N predefined wons, you may consider breaking up the series and redefining the unit size, then start from the beginning.

 

However, wons will be from a lot smaller to slightly smaller that losses. Because of the spread. From 10 pips, 3 pips spread is 30%, but from 50 pips, 3 pips spread is just 6%, so you could consider a binary "fair" distribution of 53% losses to 47% wins, more similar to roulette distribution (remember they have the 0 and 00 numbers that reduce the win ratio).

 

Isn't this a form of statistically arbitraging the win chances by taking advantage in small series of wins and losing a little during larger series of consecutive losses?

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