What can sports gamblers learn from the NAB disaster? A quick summary of the situation is as follows:

(a) A National Australian Bank foreign currency exchange dealer engaged in some loss making trades

(b) Although traders are allowed to make a loss, the pressures of the job encouraged the dealer to employ his own version of the infamous Martingale system. He tried to recoup his losses by betting against a rise in the Australian dollar

(c) He engaged three of his colleagues as conspirators in his scheme, and his losses eventually blew out to over $300 million dollars, costing the bank an entire year of growth

Perhaps the most important lesson to learn from all this is do not chase losses. There are two primary reasons for this. Gamblers who chase losses are generally in an emotionally unstable state, thereby facilitating the placement of negative expectation bets. To paraphrase Gordon Gecko from “Wall Street”, if you start becoming emotional, then you should stop betting.

Secondly, chasing losses will often lead the punter precariously close to bankruptcy. The most important money management tip is do not lose your bankroll. It seems blindingly obvious but it is something that I will emphasise throughout this article.

The other important lesson is proper staking to minimise risk of ruin. An article regarding forex trading stated that traders are generally advised to stake no more than 2% of their bank on any particular trade. This means that it would take a run of 50 consecutive losses to destroy the bank, a highly improbable event. In an earlier article, I recommended trading no more than 1% of your bank on any particular trade. This is an ultra conservative strategy designed to make a loss of bankroll almost impossible if you are placing positive expectation bets. Trading 2% of your bankroll means that the risk of ruin is very low. At 1% of your bankroll, your probability of ruin is literally trillions of times less likely than at 2%. As you can guess, I am very risk averse when it comes to my capital.

Having written a whole article on money management, I feel it is a topic of some importance. However, the most critical factor in realising a profit is the ability to make positive expectation bets. With regards to money management, the only thing that matters is that you do not go broke. Continually making positive expectation bets will ensure that you end up in the black regardless of what money management system you decide to use. I will approach this problem from several angles to demonstrate why this is the case.

Firstly, the laws of probability remain constant independent of how much money is staked. If you receive odds of $2.10 (11/10 in the British system, +110 in the American system) on a coin toss, your return on investment in the long term will be 5%. It doesn’t matter if you stake $1, $10, or $10 000 your return will be a constant 5%.

Secondly, you could run a simulation to prove that this is the case. Suppose you run a simulation with the following parameters. The event is a coin toss with a probability of 50% for heads or tails. The odds you receive are $2.01 (201/100 in the British system, +101 in the American system). You wager a completely random amount between $1 and $1000. You run the simulation one billion times. It is a mathematical certainty that by the end of the simulation, you will end up in profit. Why? Clearly your money management system is terrible. However, betting with positive expectation means that you will make a profit regardless.

Thirdly, take a look at bookmakers themselves. Balanced action is a myth and on most events the bookmakers will be holding a decision for one particular side. Therefore, the bookmakers do face an element of risk. It is important to realise that when a bookmaker lays a bet for $1.91 (10/11 in the British system, -110 in the American system), it is essentially the same as backing the other side for $2.10. When a bookmaker lays a 50/50 proposition at $1.91, he is getting a positive expectation bet of $2.10 on the other side.

So, a bookmaker is basically a gambler with no money management skills making very large volumes of positive expectation bets. This equates to millions of dollars of profits year after year. The critical factor here is the ability to sustain a bankroll sufficiently large to handle the natural swings of the binomial distribution. Although I do advocate flat betting 1% in another article, the main reason for this is for novice gamblers to avoid destroying their bankroll. Without a systematic staking plan, the gambler’s avaricious nature tends to emerge and the risk of ruin increases substantially.

A foreign exchange market is remarkably similar to a betting market. The main difference is tighter spreads and higher liquidity. In foreign exchange trading, there are no commissions and the market maker earns via a theoretical spread between the buy and sell prices. The commission is hundreds of times smaller than that of a bookmaker. The volume, at $1.5 trillion dollars a day dwarfs that of all the bookmakers combined and makes foreign exchange trading the most liquid market in the world. Nevertheless, many of the principles of sports gambling are transferable to forex trading. However, since this is a sports gambling site I will conclude the discussion here and leave forex for another time.