The foreign exchange (forex) market moves faster than anywhere else and it can feel like a maelstrom of activity. With several trade routes to choose from and a variety of time and price movable objects, there’s no shortage of opportunities to trade the market.
Perhaps the most confusing concept to enter the marketplace is that of the moneyline. While there’s no shortage of online FX brokers who use the notation %MONEY LINE% to define their offerings, very little of that marketing jargon conveys a clear picture of what the moneyline really means.
A bit of background: In the U.S., if you place a wager (for example, lay odds on a football game) and the result is a push (your side loses), you lose your money and interest on the bet. But if the result is a pull (your team wins), you win your money and interest on the bet. The odds are the percentage of tickets that you bought (your side) to win vs the percentage of tickets that were sold on the opposite side (the bank’s side).
For example, if the New England Patriots open a play and the Pittsburgh Steelers close it by scoring a touchdown, you’ll win a bet of 1 dollar and 50 cents on the moneyline for the New England Patriots vs Pittsburgh Steelers game.
The moneyline is used in the same way that a straight bet is used, except that there’s always a reserve mismatch between the odds; you’re not betting against the bank. For example, if the odds are 1:2 on a straight bet for the New England Patriots vs Pittsburgh Steelers game, you’ll be betting +100 cents on the moneyline for the Steelers. Remember: The New England Patriots are the favorite to win the game AND you like the Steelers, so you’re betting −100 cents on the moneyline for the Steelers.
Why Use The Moneyline instead of Just Raising The Bets?
Straight bets and moneylines are so intertwined that it’s not always easy to distinguish between the two. When someone comes back with an initial betting quotation citing %MONEYLINE% but without a comma, this is usually a sign that it’s a straight bet. You’re not setting up a stop loss or taking short positions on an indicator (moving average for example).
Why would you use the moneyline instead of just setting the bets higher? First, by introducing a reserve mismatch, you’re always going to have the potential for some win or loss, even in straight bets. If a teller at the casino says the ball came up in the air, it’s likely that the ball did come up in the air but you, as a player, definitely did not see it. Second, taking longer bets allows you to ride out the movement of the market and let the odds work for you, instead of fighting it. Finally, and this is particularly important for new traders, by introducing a reserve mismatch, you’re helping to keep your betting simplicity high. Remember: Over time, you’re going to win more money than you ever lose, and vice versa, and you don’t want to clutter up your decisions with too many numbers and letters. You’re more likely to make sensible decisions when you’re following sound trading rules.
How Do I Calculate The Moneyline?
If you want to find the moneyline of a specific currency pair (for example, GBP/USD), you’ll need a pair of numbers. The first is the exchange rate, which we’ve covered extensively in previous seminars. The second number is the amount of money you’re short or long (depending on which side you’re on) in the form of credits or debits to that currency. (If you want to find out more, we have a special page that explains how to readily calculate the moneyline.)
What’s The Key To Successful Foray Into The Forex Market?
If you want to become a profitable trader, it’s important to watch out for a number of key points.
First, study the history of the forex market: Learn from the expertise of those who have been there before you, especially if they were successful. If they are successful traders, it’s generally a good idea to study what made them successful.
Second, learn to love odds. While the odds of winning are always in your favor when you bet on a New England Patriots vs. Pittsburgh Steelers game, the odds of your losing are never in your favor when you bet on a college basketball game. When you watch professional sports, you’ll notice that the odds are generally in your favor unless the bookmaker is making a big profit on a particular game. Learn to love odds and you’ll love the moneyline too.