## Wednesday, February 4, 2009

### How to Gamble to Win !

One of the most common things we do during Chinese New Year is gambling.  As a matter of fact its part of Chinese culture for good or bad.  The bad is gamblers always lost more than they can affort.  The good is the casino owner earns enough to do charity for the society.

Usually gambling is consider a bad thing, especially in finance planning.  However, it is NOT all Evil in this finance blog.  Lets look into gambling and see what it is and what we can do with it, just like any other potential finance tools we come across.  We will analyse the mathematical way, the finance methods WITHOUT the emotion factor.

For the simplicity of this write up, lets assume the type of gambling we talk about here is a 50-50 chance game, like flipping of a coin.  Its either Head or Word, all other occurances are considered void and demand a replay until a Head or Word shows up.  This chances of winning is called probability.  Bear in mind that ALL games in casino are NOT fair chance in real life.

Method 1 : Doubling Up

Start bet with the smallest betting unit ie. \$1.  If you win, bet again with \$1.  If you lose, double up your bet to \$2, \$4, \$8 etc.

In this method, you are almost guarantee to win back your initial \$1 in one last win even after losing in a long series.  However, in that situation, you would win back 1 unit while risking losing 2 ^ n.

For example, at the 4th bet, you put down \$8.  If you win, you get \$16 back minus out your previous bets \$ 15 ( 1 + 2 + 4 + 8 ), your net win is \$1.  But if you lose, you will lose the whole of \$8 or a sum of \$15.  Subsequently to win back your \$1, your cost is \$31, \$63, \$127 ... Imagine you are using \$127 to earn just \$1 only at the 8th round ...

So with this method, if you have unlimited capital and the environment allows you to make unlimited betting amount, then this method will eventually help you grow your capital one step by one step.  This method is using unlimited capital to earn one single unit of increment in each series.

If you do not have such capital and if there is a limit of betting amount, this method will mostly cause you to lose because the risk and reward are just not balance.

Win Lose ratio is 1 : 1
Risk Reward ratio is unlimited : 1

This also says : The more you use this method, the longer you use it, the worst it will get.

There is really no good way to mitigate this risk.  The best you can do is to start with a fix amount of money that you plan to give away anyway.  Then divide this money into a series of fix amount.

For example, start with \$100 and set each day limit as \$8.  That way, if you lose continously for 4 times in a day, you lose all your day limit and you should stop.  Start the next day with \$1 again.  This way, you can bet for 8 days in worst case scenarios.  On good days, you stop after you win \$8.  What you are doing here is using the money that is not to be kept anyway and buy some experiences with it before losing them all.  If practise exactly as describe above, it may take much longer than you think before you lose all capital.  Hence its relatively a not so bad way to kill time if your other habits cost more (reminder : only when emotion is not a factor ie. you are a robot).

Method 2 : Follow Last Result

Start with a fix amount of capital, determine the smallest bet unit and each time bet on the last result.

For example, start with \$100 and bet each time with \$1.  So you can bet at least 100 times.  If the last result is Head, then this time you bet on Head.  If last result is Word, then you bet on Word this time.  Like wise, this time result will decide what you bet on the next time.

This way you will win if the pattern repeats no matter Head of Word.  However, you will lose if the pattern Never repeats.  Each time the chance to win is 50-50.  If you win, you earn \$1 and if you lose, you lost \$1.

Win Lose ratio is 1 : 1
Risk Reward ratio is 1 : 1

Since you have initially set minimum bet amount as \$1 with \$100 capital, then the worst case scenario is when the pattern continues to switch 100 times then you would lose all in 100 times.

Since what you want is 'repeat patterns' and avoid 'switching patterns'.  Then what you can do is to analyse previous patterns before starting your bets.

For example, every time the pattern switches, you stop betting.  If the pattern repeat once then you follow in 2nd repeats instead of the 1st one.  This is one method of 'predicting' the pattern but you may eventually find it work sometimes and NOT working for other times.  So eventually you may need to come up with many different analysis methods in different situation if possible at all.
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Just in case you still think this is just a gambling talk, I have already implicitly cover the concepts of Money Management, Stop Lose, Profit Target Setting, Trending and Technical Analysis ...