Foreign exchange market is where the currency is traded. When trade in goods and services were limited as in olden days, the system of the transaction was through barter. Barter was a system where the transaction was carried out by exchange of goods. But with the expansion of trade, this form of transaction became quite cumbersome. An intermediate between the goods traded was invented. Formerly this was in the form of coins made of metals which had intrinsic value such as gold, silver, and copper. The use of coins to buy and sell goods became convenient. The problem was when the value of goods sold or bought was high. It required that much more coins which were just too cumbersome posing a practical problem. Moreover, trade further expanded. Something easier to handle had to be invented. That was how bank notes made its appearance to substitute coins. Initially, the banknotes were pegged to valuable metals such as the gold standard. But this was later de-linked. Now the value of banknotes comes from the value decreed by governments. These banknotes are issued by banks that are controlled by national governments. Continue reading “Why is Currency traded?”

### Use of Probability of win and Statistics in Trading

#### Having an ‘Edge’ and trading vs. Gambling

Gambling: The odds are against you and you have to rely on luck to win. For example, take the lottery. Who makes money with the lottery? Well, it’s used by governments to pay for schools, etc. That means that they make a profit on the lottery. If 1 million individuals pay \$1.00 each for a ticket, the only way they can make a profit is by paying out less than \$1 million. So, the math for the lottery is such that even if some individuals are lucky, they cannot usually exceed \$1 million in total winnings among all winners. So, in other words, buying 1 million tickets yourself with \$1 million, you would end up with less than \$1 million in winnings, even if you have winning tickets. The math has been done and the probability of the game has been fixed against you.

The operators of the lottery have the ‘edge’ in this game. The only way you could possibly win as an individual is by sheer luck. You would have to randomly get one of the winning tickets. You have no control. You cannot repeat any success (in the rare event that you do win). Most of the time you will lose. Statistically, over time, you will pay far more into the lottery than you get out (if you get anything out).

The same principle is used at the casino. All the games in casinos are fixed at specific win/loss ratios which always favor the casinos (the house has the advantage of the ‘edge’). Sure, they may pay out some large sums occasionally (losses to the casino) to a few people, but they collect small steady sums (winnings to the casino). As long as their income exceeds their expenses, they make money. And with the odds fixed, they do, lots of money. All gambling is set up this way. The house always has the ‘edge’ in all gambling. In reality, this edge does not have to be significant. Even 51% winning and 49% losing will make a casino lots of money over time. It’s a numbers game.

#### How do you get the edge? What really is an edge?

If you design a trading system, test it and it works to make you money, it should do better than randomly entering trades.