Building a trading model
On a traditional sportsbook website, the bookmaker sets the prices, which include an overround to guarantee them profit whatever the outcome of the event being bet on. On a betting exchange the users of the site back AND lay bets, essentially trading odds on the outcomes of events such as horse races and football matches.
Betfair, for example, offers punters the option of betting via the sportsbook (which for beginners may be easier to understand) or via their Betfair Exchange (which takes a bit longer to master, but is by no means complex). There are very often higher prices (better odds) available on the Betfair Exchange, with no bookmaker margin built into the numbers, whilst Betfair take a small commission on each bet to fund the site.
With the way that odds can fluctuate on betting exchanges it presents the opportunity to trade those prices as they decrease or increase over time. Putting some time into learning this skill and building your own sports trading model can provide you with a tidy profit if you proceed diligently and logically.
Once you know the basics and you understand how to develop a trading model, you can potentially automate some parts of your activity, you can bring in knowledge and theories from the financial markets and learn how to avoid the most common mistakes. As you do this you can build hands-on experience of benefitting from the movement of odds and maximise your profit margins along the way.
Trading odds like commodities
The revolutionary idea of businessmen Andrew Black and Edward Wray to launch the Betfair Exchange in the summer of 2000 saw the birth of sports odds trading. Their new website was created around similar concepts to those of the stock market, but instead of commodities such as crude oil, gold or natural gas, the commodities being sold were betting odds.
So instead of buy low, sell high the motto here would be, lay low and back high. Of course, odds fluctuate on the sportsbook, but only on the exchange can you truly trade on those fluctuations.
Let’s look at a simple example to illustrate how to trade on an exchange, in this case on a football match. We want to see if we can make a profit by betting on the final result being a draw (backing the draw) and also betting against the result being a draw (laying the bet on a draw). It won’t always be possible to make a profit doing this, or everyone would back both eventualities on every match! However, once you start to watch the odds on an exchange in detail you will see that they are constantly in flux and change much more than on the sportsbook.
Prices change before and during the game. So if the price we initially backed the draw at reduces we can then also lay the draw to guarantee ourselves a profit, whatever the final result.
Say we had backed the draw at odds of 3.0 (2/1) putting down a stake of £100. That will give us a profit of £200 if the match turns out to be drawn or a deficit of £100 if it’s not a draw. We then look at the odds on the exchange at half time, with the score being level. The odds are shorter of course because the teams are evenly matched and it is now more likely that a draw will be the final outcome. The odds have changed, so we decide to lay the draw at evens (2.0 or 1/1), with a £150 stake. This provides a profit of £150 if the game is drawn or a liability (or loss) of that same amount if it’s not a draw. So overall whatever the result, given our earlier bet at 3.0 (2/1) we make a profit of £50.
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So far we have considered just one example of sports trading, but there are almost infinite amounts of trading possibilities with many thousands of markets to bet across. Just think that within one sport – horse racing – this is going on around the world in different countries, under different conditions and with different rules. So the possibilities are almost endless, whilst the basic principles of trading remain the same, even as your strategy and trading models become more sophisticated.
There are many different strategies to consider – such as dutching, laying the field, scalping, cross-market trading and swing trading. This is by no means an exhaustive list, but let’s consider these fundamentals and then you can take your research and practice on from there.
The practice of dutching is almost like inverted bookmaking. As the trader, you spread your stake across an array of selections to hedge your bets against the possibility of one, individual wager not coming in. In theory, you can back every selection in a market and still come out winning (provided the prices are right and give an ‘under-round’), or at least not losing.
Let’s say it is a greyhound race you are betting on and there are four runners. You are looking for the average price of backing each dog to be 4.0 or above. You back Dog 1 at 3.0 with a £20 stake and Dog 2, Dog 3 and Dog 4 all at 9.0 with an £8 stake on all three. These are theoretical numbers only and you will have to study the markets carefully to identify such potential scenarios, but once you do find them you would see that it does not matter which dog wins, you would still turn a profit.
Laying the field is another tactic which involves multiple selections on the same market, usually a race. An example of this is to lay a bet on all the selections you can with the goal of acquiring enough trades at adequate prices to obtain a profit, no matter the result. This is usually done by laying on selections across the market at prices below 2.0 so that a profit is ensured once a minimum of two selections are taken up. The markets do not present these possibilities that often and an-depth knowledge of the market in question is required to make a success of laying the field.
Scalping refers to watching small price fluctuations very closely and backing and laying in quick succession just a few ticks (differences in price increments) apart. This is fast-moving work in markets where odds change in seconds as opposed to minutes and is usually a low-risk, low-profit trading model in the short term. A scalping model could be regularly backing under a certain amount of goals in the final minutes of a match and then laying the same bet as the price drops shortly after.
Swing trading is fairly self-explanatory and is a very common trading model. Again you are looking for price changes but at a greater rate than simple scalping trades. There’s more of a risk here as you are depending on something significant to happen to affect the prices (a red card or penalty in a football match, a going change in a horse race, a key wicket in the cricket). Once a change in circumstances affects the movement of punters money you need to be trading accordingly on that swing in prices.
With cross-market trading, this is not really for beginners as you are looking to trade across markets and you have to take in a significant amount of information to trade with making a loss, especially given the added factor of commission calculations. Experienced traders may move money across markets such as correct score and under/over X goals in football matches, but here they have to factor in paying commission on a winning bet in one market, and that cost not being offset by money lost on another market. So, in essence, cross-market trading sees you pay more commission.
But you may find that you can still make money by finding value laying under a certain amount of goals offset against another market (laying all the correct score possibilities for example) on the same match.
You can also set up your trading model around team news if your knowledge is really extensive in one sport. Maybe you see value in prices and potential for fluctuations after a team has named what you deem to be a strong or weak line-up, in football or rugby, for example, if you can react quickly you may be able to benefit.
Speed is the name of the game. This is also true with exiting trades as fast as possible when required. You don’t need to make a profit on every trade and preventing losses where possible is more important. If prices start to move against you scratch your trade (cancel the trade by placing an opposite wager) and move on to your next challenge.
Software to automate your calculations
Examples of software that you might use to assist your trading strategy could include Betfair’s trading software and cash-out features, BetTrader for Mac or Geeks Toy for Windows.
You can also use an arbitrage calculator to work out sums which guarantee a profit in two-way or even three-way markets, where prices permit. Margin calculators allow you to quickly compare odds with probabilities.
You are competing with thousands of other traders on betting exchanges and on these peer-to-peer platforms, and only the savviest, quickest-thinking and fastest-acting traders make money. Software assists their velocity of calculation and sleight of hand.
Trading software provides massive data advantages, in addition to greater speed in execution of bets. You can see changes in prices quicker and use presets such as specified stake amounts to stay ahead of the game. There are even automated trading apps which use software to automate your trading once you stipulate certain pre-conditions. There is competition for custom between software providers with new products constantly entering the market so find the tool that works for you and stay alert for improvements with new iterations and updates.
Avoiding common mistakes in trading
As speed is essential always ensure you have a super-fast wifi connection and potentially even a mobile internet back-up. Losing your connection at a key moment in a race or a match could cost you money. Having a dual or multi-screen set up may also gain you crucial seconds over slower traders stuck on one screen.
Keep a bank of money you are initially prepared to lose. This may not sound positive but just like gaining experience in financial markets you have to be realistic about losing some cash along the way as you learn to trade and build up your experience. Your objective is to lose as little as possible and in the long term make a profit, but small losses which you manage and reduce as far as possible, are inevitable along the way.
Only trade on a small % of your overall bank at any time, especially at the beginning. You can keep your initial deposit for trading on an exchange separate from a pot you might still use for sportsbook betting to keep things clearer.
It is easy to become saturated by taking in too much information about different trading models or trading across too many platforms, markets or sports at the same time. Spread your risk by all means, but learn to focus on specific markets in specific sports and improve your strategy by building up a strong record with one or two trading models at first.
Take your time, don’t act on FOMO (fear of missing out), build up your bank with smaller, low-risk trades and don’t rush into battle with the big hitters in the market. Keep a well-organised record of your trades and learn from small, inevitable losses as you go.