5. Trading

The previous two articles about Back and Lay explained to us that it is possible to buy and sell bets on a betting exchange. Depending on how you use the exchange, you will be...

Back / Sell Exclusively = A bettor
Lay / Buy Exclusively = A bookmaker
Buy and sell = A trader

Trading is one of the most interesting activities that betting exchange offers. It enables you to trade the odds on sporting event outcomes just like with goods on eBay, a used car or everything else that you can buy and sell. The aim of the trader is to buy and sell commodities at a profit. When somebody is in business selling used cars, it means that his ultimate goal is to make money trading and not to actually own the cars. He wants to buy car somewhere cheaply and then sell it to someone at a profit.

Trading on the betting exchanges is exactly the same – it is not about betting, nor guessing the outcome of a match (either as a punter or as a bookmaker). A trader always wants to buy from someone cheaply and then sell it at a higher price. A trader is not interested in the outcome of the game, because whatever the result of game he will already have money earned on the difference between buying and selling prices.

Price Movements

To be able to trade something successfully, then obviously prices have to change. With most commodities, supply and demand will ultimately determine the price paid at a particular time. Sports’ trading is no different, and the price at any given point is ultimately determined by those who think an event will happen, and those who think it won’t. News and other related events also play a big part in price movements. Imagine if a football team’s top striker is injured the day before an important game, which in turn increases the odds on the team winning the next day. Or perhaps in horse racing, where the world’s greatest tipster makes a pick, and all their followers then bet on that pick, thus driving the price down. You can also even trade events “In Play” where just about every action in the game could cause prices to move in some way.

Trading example

Let's take a closer look at how a trade on Betfair can work. In our example there is a football match between Chelsea and Manchester United with following prices before the game starts:

Chelsea @2.54
Manchester United @3.05
Draw @3.45

The Prices of a selection represents the probability that the even will occur, and can be constantly changing. Prices are directly related to probability in that probability = 100 / price. If any team were to score a goal the price on this team will decrease, as the probability of this team winning will increase. For example, should Chelsea score a goal the prices on the market may then be:

Chelsea @1.40 (price has decreased)
Manchester @7.20 (price has increased)
Draw @5.10 (price has increased)

As traders our interest is to buy low and sell high. {Or buy high and sell low}. If you think that the price on Chelsea after scoring a goal is cheap enough, and you feel that Manchester untied will score, (which would raise the price of Chelsea), then we buy Chelsea. We purchase this price for 100 GBP or in other words we place a Lay bet @1.40 for £100. The market situation will after purchasing the price look like this:

Chelsea – £40
Manchester + £100
Draw + £100

At the moment we are in the open position but as traders our interest is to close a position with a profit. As such our aim is to complete the second part of the trade - in this case, sell the purchased price of Chelsea. Suppose that after ten minutes, Manchester scored a goal and the prices have changed again:

Chelsea @2.60 (price increased)
Manchester @3.00 (price decreased)
Draw @3.45 (price decreased)

We bought Chelsea @1.40 and are now Chelsea @2.60, which means that at this moment we can sell at more expensive price than we paid to create a profit. So we Back £100 at the price of 2.60, and this leaves our position the market as:

Chelsea + £120
Manchester £0
Draw £0

At this juncture we cannot lose! However as traders, we want to profit from this market whatever the outcome and this can be achieved using a technique called hedging.

Hedging / Cash Out

Hedging (also known as Greening, Level Profit or Cash Out) is a clever way to ensure you lock in the same profit or loss irrespective of the outcome of the event. The example above shows that we have made a profit only on the selection we traded, Chelsea. On the other selections we have won nothing. Hedging distributes your profit or loss across all selections so that:

To spread your profit from one selection to the other, we have to buy / lay this selections price (for less money). This reduces the profit on Chelsea, but increases the profit on Manchester and a draw, so they become equal.
To spread your loss from one selection to the other, we have to sell / back this selections price again (for less money). This reduces the loss on the traded selection and at the same time increases the loss on the other selections so they become equal.

The actual formula for hedging is (profit or loss) / current price. So using the above example, we would buy / lay Chelsea at 2.6 for £46.15. {£120 / 2.6} The result is that you will win £46.15 Irrespective of the outcome of the match.

Luckily you don’t have to do this calculation for every trade, as Geeks Toy has built in functionality that does this for you on the click of your mouse, but it is good to understand how hedging works.

Benefits of hedging

You do not have to worry about the outcome of the match. You always know in advance what your profit or loss will be.
You have a much smaller fluctuations in your account - gains and losses are smaller, but more regular and always given.
Much smaller fluctuations in your account are much better for your psyche, which is essential for successful trading, as you will read in the next chapters...

Summary

Trading on Betfair has the following principle:

Back + Lay
Hedging (Cash Out)

As you can see, the principle can be described in two lines and is therefore very simple. However whilst the concept is simple, making money from trading is far from easy!

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