Trading is something that every one of us does almost on a daily basis in one form or another (ie shopping!), but as it refers to sports betting, trading is essentially the act of buying up gambling liability at one price and selling it on at another for a profit (great!) or a loss (not so great!). Trading in this sense is not quite so obvious as buying bread from a local shop, but in this guide we will look at the basics of trading with a view to introducing the beginner to the concepts involved.
Introduction to Sportsbetting Trading
Betting exchanges like Betfair allow people to bet for or against an outcome on a market/event. This ‘outcome’ is generally referred to as a ‘selection’, so to bet ‘for’ the outcome to occur you would place a Back bet or ‘back the selection’ and to bet against the outcome you would place a Lay bet or ‘lay the selection’ (you are ‘laying’ or accepting a bet from someone else who thinks the outcome will occur). An example of this might be an event like a football game with Man Utd vs Liverpool – you might opt to back Man Utd to win if you think Man Utd will win, or lay a bet against Man Utd if you think they won’t win.
By placing one back bet for a fixed stake on a selection in a market, and one corresponding lay bet on the same selection in the same market, you are effectively making a trade – as such we will refer to a ‘trade’ as a pair of bets – one opening bet and one closing bet. Generally speaking, if you lay a selection in a market at a low price and then back the same thing at a higher price, you will make a profit if that selection wins and if that selection does not win you will make zero loss.
The order in which you place the pair(s) of bets does not matter – you can place a lay bet first, followed by a back bet; or you can place a back bet first and then a lay bet; or you can even place 2 lay bets and then later place 2 back bets. The important thing is that the total amount you stake on the back side must equal the total stake amount you accept on the lay side.
Additionally you can lock in a profit by placing a ‘hedging bet’ when you are happy with the trade or trades that you have placed on that market. So for example if you’ve backed Man Utd at a price of 3 and laid at 1.5, as long as the stake amounts are equal then no matter what happens you will not make a loss – even if Man Utd lose – and if Man Utd does win, you will make a profit. However if you want to lock in a profit no matter whether Man Utd win or lose, you would place a hedging bet so that you make a profit no matter if they win or lose.
Placing a ‘hedging bet’ is also referred to as ‘greening up’ (or any other term involving green!) – the reason for this is that when you place a hedging bet on the Betfair exchange that will result in you making a profit no matter who wins and you have the ‘What if?’ indicators turned on in your settings, you will see a green number to the left of every single selection in the market to indicate you’ll make a profit no matter what the result. You have ‘greened up’! (Another etymological slant on it is that ‘green’ is the colour of the US dollar and in popular 20th/21st century street slang ‘green’ is used to refer to making money.
You might hear a few terms bandied around when discussing trading, here are a few of the more common terms:
- Opening / closing position – an opening position is a bet that marks the start of a trade; a closing position is a bet that ends a trade or ‘closes’ the position. For example one might say “I opened the position when the price was around 5 after they’d conceded the first goal and then closed the position at 1.5 after they’d scored their third goal.” (in this example the opening bet would be a back bet at odds of 5 and the closing bet a lay bet at odds of 1.5).
- Tick – a tick is a single ‘increment’ of price on a market’s ‘odds scale’ – for example one might say ‘the market price moved one tick from 1.01 to 1.02 very briefly until it was obvious that the 4 goal lead was never going to be bridged in the final minute’.
On Betfair, the lower the odds, the smaller the increment per tick and the larger the odds, the larger the increment per tick. On financial markets, ticks are similar to ‘pips’, with pips generally referring to a scale with a much finer gradation (for example in forex trading).
See here for a tick chart explaining the price increment per tick per odd size for Betfair (as above, you can see that for smaller prices the increment per tick is small compared to much larger increments per tick for larger odds).
- Scalping – a trading technique or session that involves a large number of quick trades, each of which are just one or two ticks in size. The idea is to minimize the profit/loss on each individual trade whilst generally getting a feel for the way the market is moving and hopefully getting it right more often than wrong.
- Hedging/Greening – the act of placing a single bet at the end of a trade or trading session in such a way that no matter what the outcome, a guaranteed profit is made. For example someone might say “I’d traded on the price as it came in all the way from 5 to 4 and decided to call it a day at that so I greened up.”.
- LTP – Last Traded Price – the last price that money was actually taken at on the current market (can be back or lay side). For example if someone backed a chunk of money at odds of 12.5 whilst you have a queued lay bet at 12, you might say “I was tempted to take the LTP of 12.5 even though I’d queued at 12 for hours.”.
- Queuing / Queued Lay/Back Bet – entering a bet at a price above or below the LTP in the hope that the market will move in the right direction so that your bet is accepted.
Why use a Betting Exchange to Trade?
Trading is generally done on a betting exchange for the simple reason that all your bets are done in one place. In reality though you can place a back bet at a bookmaker and place a lay bet at an exchange and that pair of bets could be considered a ‘trade’, and in fact ‘trading’ is at the very centre of advantage play / arbitrage / ‘matched betting’ where you are looking to fulfil some kind of wagering requirement for minimal loss in order to qualify for a bonus, although for the sake of trading it is a lot easier to place all your bets on an exchange.
Types of Markets for Trading
The markets that you bet on can make a big difference in terms of how far the prices will move around. The odds on a 1×2 football market will generally not move around a lot at all before the game starts, whereas the odds on a horse racing market generally WILL move around a huge amount just prior to the off. As a result, horse racing in the last 10-15 minutes before the off is usually a prime target for traders to trade on because of the large swings that can be seen which in turn relate to large profits (and potentially losses!).
If you are starting out though, it is a good idea to try very simple trades on a low volatility market like a horse race that is due to start in 20-30 minutes time (be very careful not to leave it too close to the off though because it’s easy to get caught out and leave yourself open to large losses). 1×2 football markets are OK to practice on, but generally they don’t actually move enough to be able to experience opening a trade at one price and closing it at another pre kick off (although in play is a different matter and prices will move around a lot).
Also, if you’re starting out and this is your first trade, it is highly advisable to bet on a selection with very low odds – the reason being that any mistakes at low prices are minimal compared to at higher prices. To see this, imagine laying £2 at 1.01 – your ‘liability’ (the amount you will have to pay out if your selection loses) is just £2*0.01 == 2p; now compare that to the liability involved if you lay £2 at odds of 1000 – your liability is an eye watering £2*999 == £1998!!! When practising with trading, ALWAYS try and stick to odds under 2.
You do NOT have to use any tools to trade, trading is perfectly possible just by placing bets within the web interface of the exchange you’re using. However there are a number of benefits to using third party trading tools:
- Bets can be placed very quickly with a single click.
- Market movements can be seen / taken advantage of in real time rather than having to wait 5 seconds for the market to refresh in a web interface.
- Hedging bet calculations are handled by the trading software so you don’t have to do the maths separately/guess at it.
- Historic graphs can be seen quickly and easily for the market you’re trading on, allowing you to spot trends if you’re a chartist/like graphs(!).
betting exchanges do have an API (a computer programming ‘thang'(!))
that allows people to develop their own trading software, however some
exchanges are more popular than others and so in turn, the most popular
exchanges (Betfair at present) tend to have the largest choice of
trading tools available. A personal favourite of mine would be “A
Geek’s Toy” (AGT) for it’s raw power – it is not the prettiest of
applications you’ll ever come across, but it is just incredibly
functional as a trading tool.
Trading 101 – A First Trade
Now we will look at a very simple / trivial ‘first trade’, looking at the maths involved with the trade in an attempt to understand how trading works. First of all we will place an opening bet (‘opening a position’), then we will place a closing bet (‘closing the position’) and then look at the profit/loss from that trade. After that we will go on to look at how we place hedging bets (both for locking in profits and losses) and what effect that has on the P&L for the trade.
The market we will use in this example is the Man Utd vs Liverpool 1×2 market for no other reason that I mentioned it above! We will trade on the ‘Man Utd’ selection (ManU). It could be any event/market/selection though, the same principles will apply so long as you are sticking with the same selection in the same market to place your trade(s).
We will also use a stake size of £100 for the simple reason that it is a nice round number – if you want to try this kind of trade yourself I would highly recommend you use the lowest possible stakes – £2 on Betfair, or if you don’t even want to stake that much you can use a trading tool such as AGT and use even smaller stakes.
For the opening bet we back ManU to win for £100 at odds of 3.
P&L / ‘What If’ scenario for the back bet:
- If ManU win: £200 profit
- If ManU lose: £100 loss
For the closing bet, we lay against ManU to win for a lay stake of £100 at odds of 2.
P&L / ‘What If’ scenario for the lay bet:
- If ManU win: £100 loss
- If ManU lose: £100 profit
Overall Trade P&L
Based on the very simple trade / opening+closing bet above, we can easily work out the P&L by just adding up the ‘profits’ and ‘losses’ for each possible scenario:
- If ManU win: P&L == back profit – lay loss = £200 – £100 = £100
- If ManU lose: P&L == lay profit – back loss = £100 – £100 = £0
in this case you can see that no matter what happens you do NOT make a
loss – even if ManU loses, the worst possible outcome is that you will
make £0 profit/loss. Alternatively if ManU DO win, then you make a
profit of £100.
Placing a Hedging Bet
Now let’s look at how we can lock in a profit no matter whether ManU win or lose. The general ‘rules’ for calculating hedging bets are as follows (it is definitely worth remembering this simple formula if you can):
- If you currently stand to make a profit if the selection wins, place a lay bet equal to WinProfitAmount/CurrentLayOdds at CurrentLayOdds to lock in a guaranteed / greened up profit.
- If you currently stand to make a loss if the selection wins, place a back bet equal to WinLossAmount/CurrentBackOdds at CurrentBackOdds to lock in a guaranteed loss.
So, taking the above ‘rules’ for calculating hedging bets, if we want to lock in a profit based on the fact that:
- we currently stand to make a profit (WinProfitAmount) of £100 if the selection wins, and
- the current lay odds (CurrentLayOdds) are 2,
we would need to lay a stake of:
- WinProfitAmount/CurrentLayOdds = £100/2 = £50 at odds of 2
Overall Trade P&L (including the hedging bet)
Finally we can look at what effect the hedging bet has on our overall trading P&L on this market. To do this we need to work out what the profit/loss will be for the case that ManU wins/loses, and then add those profits/losses to the overall p&l amounts for the ‘Overall Trade P&L’ section above:
P&L / ‘What If’ scenario for the hedging lay bet:
- If ManU win: £50 loss
- If ManU lose: £50 profit
and finally the overall profit and loss for the trade including the hedge bet:
- If ManU win: P&L == back profit – lay loss – hedging lay bet loss = £200 – £100 – £50 = £50
- If ManU lose: P&L == lay profit – back loss + hedging lay bet profit = £100 – £100 + £50 = £50
days! We’ve greened up because no matter what the result now, we stand
to make £50 profit! Note though we DO have to pay commission on any
profit on that market, so the actual profit and loss will be £50 –
commission (the default rate at Betfair is 5% so overall P&L would
be £50 – £2.50 = £47.50).
Locking In A Loss
It is worth talking about the situation where you might want to lock in a loss on a trade. It’s not entirely obvious why anyone would want to ‘lock in a loss’, so why do it?
As an ‘exercise’ to see why you’d want to lock in a loss, try copying the above trade but switch the odds around so that 2 becomes 3 and 3 becomes 2 and then work the maths out.
As tempting as it is to say ‘do that exercise, post it in and I’ll grade it….’ I won’t do that….!
Instead the ‘summary’ of the maths would look like this for the trade where you’d backed ManU at 2 and laid them at 3:
- If ManU win: P&L == back profit – lay loss = £100 – £200 = -£100
- If ManU lose: P&L == lay profit – back loss = £100 – £100 = £0
So you can see that IF ManU win, you will actually lose £100
which isn’t great. And to make it worse, the best case scenario is
that ManU lose, in which case you just break even… not fantastic.
Now imagine you don’t want to suffer a £100 loss if ManU win. What you can actually do is opt to lock in a loss no matter what happens – ok you will make a loss either way, but at least it won’t be as bad as losing the full £100.
The hedging back bet you would place would be:
- WinLossAmount/CurrentBackOdds = £100/2 = £50 at odds of 2
(the fact it’s again £50 is purely coincidental and just down to the round numbers we’re using for simplicity, in reality your hedging bet for a ‘loss on win’ scenario won’t always be the same as for the case when you’re in a ‘profit on win’ scenario)
With this hedging bet, now what we have is the following p&l:
- If ManU win: P&L == back profit – lay loss + hedging back bet profit = £100 – £200 + £50 = -£50
- If ManU lose: P&L == lay profit – back loss – hedging back bet loss = £100 – £100 – £50 = -£50
So, finally we can see that we’ve locked in a £50 loss no matter what happens – not great, but not as bad as losing £100 in the case that ManU wins. It is worth saying that this is a fairly trivial case and the difference between losing £50 or £100 isn’t that large – however for trades at longer odds the potential losses can be absolutely massive and it really does become essential to understand how to lock in a loss under those kind of circumstances.