Friday the 13th, Halloween, black cats, ladders (excuse the pun ) can all bring on superstition, foreboding and dread. So can trading, but trading doesn’t need to be scary.
When you start playing with numbers, you learn a lot. Encapsulating things into a mathematical description allows you to estimate risk pretty well and frame your opportunity.
But even if you are not in maths that much, you can use the same principles to understand your true objective and use that to move from a losing strategy, through breakeven and into a fully profitable strategy.
You don’t need to be a genius
First off, let’s get some things on the table.
I don’t possess some superhuman ability, nor did I spend years trying to become some sort of intellectual elite. I’m not particularly amazing at anything, just generally good at a combination of things. That’s turned out to be the perfect mix for my current role. I leant that this is more or less about all you need to do to get ahead of the crowd.
By helping others, I’ve also seen that if you are too logical you tend to miss many opportunities. Trading is all about taking risks, not trying to eliminate all traces of risk! But on the flip side, if you are too emotional it leads you to probably take too much risk, or react badly when you have a loss.
All those things are equally fatal to a trading career, especially where money and risk are concerned. But I also learnt through this what types of people struggle when trading and the mistakes that they can make. I also learnt you can see this with amazing regularity in the market.
As it turns out a moderate attitude to things is helpful when trading. In that, I got lucky.
I started trading by accident
I started trading by accident.
The very first thing I did on betting exchanges was arb between bookmakers and exchanges. Back then, that was relatively easy money as pricing was loose on the exchanges and sportsbooks and bookmakers hadn’t cottoned onto them.
One day I entered an amount incorrectly, tried to correct it and the price moved at that exact moment. Suddenly I had a free bet! I was slightly confused at first, but woke up the next morning thinking ‘Why don’t I just arb on the exchange’? My Betfair trading career was born.
I started experimenting with using different stakes and spreads between prices and generally got pretty excited about what I had discovered.
How I started Betfair trading
The very first trading idea that I had was to just go into the market and see what happened.
So I would place two bets into the market by backing at the current lay price and laying at the current back price. Then I would wait for the orders to match, hopefully. This is where the ‘Make Market’ button comes from, my very first trading strategy on Betfair.
I was already working on Betfair, Football and Golf financials, but Horse Racing looked like a great candidate. There seemed to be a race every ten minutes or so, so this would allow me to experiment to my heart’s content.
And the rest, as they say, is history…
How I moved from random to profitability
Of course, if you do random trading strategies, randomly into a random market, you will end up with random results. That’s exactly what I achieved with my early forays into various markets.
But I achieved some important things.
First I learnt how the markets worked, how they behaved and what the underlying strike rate was. If you have a trading strategy that fills one tick away from your entry price then your strike rate will be significantly higher than a strategy that fills ten ticks away. I was interested in how often.
Framing a trade in this manner would allow me to know what I would need to turn profitable. To get a positive expectancy I would need to know my winning strike rate, how much I won and how much I lost. With that knowledge, I could start to refine my entry, exit and market selections. That’s ‘all’ I needed to get profitable.
Trading doesn’t need to be scary
One of the most important lessons I learned during this period is that trading doesn’t need to be scary.
As I experimented with my early trading strategies, I reached an interesting and logical conclusion. As long as I kept my entry, exit and staking consistent and in proportion to my risk, my worst loss was break-even less any commission I had paid.
No matter how adventurous my strategy was, it more or less balanced out over a reasonable number of events. Slightly more if I was going for low strike rate trades.
I reached two simple conclusions.
For any strategy, if staked correctly and independent of a prior trade, the maximum loss was zero less commission. OK, the maximum profit was break-even, in essence, but the actual barrier to profitability was a really small barrier that you had to cross.
To get to profitability, I needed to refine my entry, exit, staking, market selection, or strategy selection. Any of those, or some in combination, should do the trick. I just needed to be a little better than average to achieve profitability.
And with that, I set off to cross that barrier.