It's often been said that trading and investing are remarkably similar to gambling. In fact, professional traders and professional gamblers alike are usually in agreement with this, particularly since the two approaches share a number of similarities, not least the potential for high reward and the presence of risk. Investing and gambling also involve an element of chance and uncertainty, as well as the allocation of financial resources to achieve a desired outcome.
Over time, gamblers have made use of several different strategies and betting systems to improve their odds of winning when playing games like blackjack, either in brick-and-mortar casinos or online at platforms like the following: https://www.bovada.lv/casino/blackjack-games. Given that gambling and investing have so much in common, Is it possible, then, to apply these strategies to developing your personal finance portfolio? And, if so, what are the methods that can deliver the most profitable results?
The Martingale System
The Martingale System is a system of betting where the bettor doubles their bet after each loss in the hopes of recouping their losses and eventually making a profit. The theory behind the system is that the bettor will eventually win, and the winnings they generate will be enough to cover all previous losses and turn a profit. However, this strategy can also spiral into a longer losing streak as the bets will continue to increase in size.
Using the Martingale System in Trading and Investing
The Martingale system is a simple enough method to understand in theory, but in practice, it needs to be applied differently to your personal finance approach. The strategy is commonly deployed in the casino when playing games of chance where there is an equal probability of winning or losing. However, this strategy needs to be modified when it comes to trading and investing, as the financial markets are not as straightforward as betting on a roulette table.
The Martingale is most effective when applied to Forex trading due to the relative stability of currencies compared to stocks. While companies can go bankrupt, most countries rarely let their currencies fall to zero. This means that even when a currency experiences a sharp decline in value, it is unlikely to reach zero. Additionally, the FX market offers the advantage of earning interest, which can help to offset losses.
In contrast, the anti-Martingale or reverse Martingale is the opposite of the Martingale system. When applied to gambling, this methodology involves halving a bet with every loss and doubling it with every gain. The aim of the anti-Martingale system is to amplify profitable streaks and minimise the impact of any losing streaks.
The Fibonacci System
The Fibonacci system is a betting system that is based on Fibonacci numbers. Fibonacci numbers are a sequence of numbers where each number is the sum of the two before it. The sequence starts with 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and continues infinitely.
As with the Martingale, the Fibonacci is a negative progression system when applied as a betting strategy. In this instance, it uses the sequence of numbers to determine the next bet size following a loss. Using the system, bettors place a base bet then, when a loss occurs, they add together the two previous bet sizes to determine the next bet size. In the case of a win, the bettor goes back two steps in the sequence and places the same base bet again.
Using the Fibonacci System in Trading and Investing
Fibonacci numbers are a popular tool used by professional traders in several different ways. However, the complex nature of these approaches can make them unsuitable for beginners, and they often generate better results when applied to the stock market. The five types of investment techniques based on the sequence are arcs, extensions, fans, retracements and time zones.
The D’Alembert System
The D'Alembert system is a gambling strategy often applied to the game of roulette. The system is named after the French mathematician and physicist Jean le Rond d'Alembert, who developed the concept in the 18th century. The system itself is a negative progression betting system, which means that, like the Martingale, bettors increase the size of their bet after a loss and decrease them after a win.
The system works as follows: players start by betting one unit on an even-money bet, such as red or black in roulette. If they win, they keep the winnings and bet the same amount again on the next spin. If they lose, they add another unit to the next bet. This process continues, with the bet being increased by one unit after each loss and decreased by one unit after each win until the player reaches their desired profit or limit.
Using the D'Alembert System in Trading and Investing
In practice, the D'Alembert system cannot guarantee success 100% of the time, as the odds in most gambling games, including roulette, are stacked in favor of the house. The system can also result in significant losses if the player experiences a losing streak. However, in a simplified form, it can be applied to trading and investment scenarios.
When using this system, each trade you make should have a fixed stop loss (SL) and take profit (TP) range. After each loss, the trade volume of your investments should increase by the base volume and, following a profit, the volume should decrease by the same value. This "lose less, gain more" approach can occasionally provide a long-term success rate of 45-55% since it needs only a few individual profits compared to losses to reach overall profitability.