Even big guys can lose their shirt... it doesn't matter if it is Forex Trading, stocks, or gambling. As we have recently seen in the financial markets, bad choices and risky behavior can bring even mighty banks down.
How can YOU avoid the bad decisions and bad techniques that create account killing errors? Strangely enough it is status as a "little guy" that can be salvation for the non-professional trader. By adopting disciplined Forex trading behavior and realizing how you are vulnerable can make you a wining trader!
The fact is most Forex traders lose just because they've never heard of "Trader's Ruin." More commonly called "Gambler's Ruin," there are a couple of reasons that it is important that the Forex trader understand this concept.
1) Understanding this concept can easily make the difference between trading career success or failure.
2) Failure is a statistical, mathematical CERTAINTY if you don't know the techniques required to beat Trader's Ruin.
The Road to Ruin
It has been said that the difference between gambling and speculation (or trading) is that in gambling the odds are fixed and they are always in favor of the house and in speculating the trader uses his intellect to shift the odds in his favor. So logically, the GAMBLER, even if he wins in the short term, if he keeps gambling, in the long term he will certainly lose. It then seems logical, that the SPECULATOR (read Forex TRADER), who is adept at selecting Forex trading strategies where the odds are consistently in his favor, may win or lose in the short term, but over the long haul will come out ahead.
The SAD TRUTH is that this is NOT TRUE.
Even if you had a source for Forex trading signals that had more winners than losers, the statistical reality is that if one side of the trading dynamic (the Forex market) has more resources (deeper pockets) than the other side of the trade (read YOU), over the long term the player with more resources will statistically always wind up with all the money. OUCH!
For those of you that don't care about the math an easy illustration is two traders playing a game of flipping coins. Trader One (T1) and Trader Two (T2) each have the same number of coins. Each trader takes turns flipping a coin and the other trader calling "heads or tails". If the calling trader guesses right, he gets the coin. This is even odds, with each trader having 50% chance of winning any flip. However, if you repeat this process long enough, eventually one trader will have all the coins - it is a 100% statistical, mathematical certainty.
If one trader starts out with significantly more coins than the other, that trader is the one that will take all the coins. If you want to see the math it looks like this, where T1 and T2 are Trader One's and Two's probability of losing respectively and "n" is the number of coins held by each trader.
T1 = n2 / (n1 + n2)
T2 = n1 / (n1 + n2)
If you plug in different numbers you can see how it works. If Trader 1 and Trader 2 have equal numbers of coins - let's say 100 coins each. Then the probability that Trader 1 will lose all his coins is 100/200 or 0.5 which is 50%. There is a 50-50 chance that either trader will lose all his coins to the other trader. BUT, if one trader has a much larger number of coins than the other watch what happens.
If Trader one has 1000 coins and Trader 2 has only 100 the chances of Trader one losing is 100/1100 or 0.091, this says that the chance Trader one will lose all his coins is only 9.1%, less than one out of ten. If Trader 1 is the Forex market, with essentially an infinite supply of coins, the chances of Trader 2 winning are infinitesimal. Translated in ordinary terms, this says that if there are two traders, each trader's chance of going broke is equal to the ratio of the number of coins your opponent has to the total number of coins you both have. This means, that without some major aberration (called a real run of incredible good luck) that the trader with the smaller bank account will always lose.
It seems logical that this is true in Las Vegas, where the odds are always against you. But it seems so unfair in Forex market trading. The harsh truth is this applies to the stock markets, investment houses, hedge funds, large private investors and Forex Traders! It is all about "staying power." The more money you have, the longer you can stay in the game, the better your chances of coming out ahead.