I recently received a message on Facebook that touched on a common issue many newcomers face when starting to trade on Betfair. Unfortunately, I can’t locate the original message due to the volume I’ve received over the past week, but I’ll do my best to summarise the issue and my thoughts on it.
A recurring question from those new to trading involves when to enter and exit the market, and what profit or loss margin to aim for. The advice I give is usually the same, although not straightforward. Each trading situation is unique, and there aren’t universal “in” and “out” points. However, one consistent piece of advice I offer is: it’s always better to offer a price than to take one. Unless the market is moving rapidly and you risk missing out on a trade, offering a price can save you a tick per trade, which adds up significantly over time—potentially hundreds of ticks per month.
The question from Facebook went something like this:
“If I’m scalping Betfair, taking one and two ticks at a time, and the market moves against me, how far should I let it go before closing out for a loss? I typically use a rough stop-loss of about 4 ticks, but even though I often judge the market well, I end up losing overall.”
This query highlights a critical error in the trader’s approach: a disproportionate risk-reward ratio. They are risking up to 4 ticks to gain only 1 or 2. This sets up an unfavourable scenario where, due to the 50/50 nature of price movements (up or down), the trader must be correct 75% of the time just to break even, given they are betting odds-on.
A more balanced approach would be to aim for a 1:1 risk to reward ratio, where potential gains and losses are equal. Additionally, always offering a price can give you a slight edge by increasing the time your trade is active, improving the likelihood of a favorable outcome if your market reading is accurate more than 50% of the time. This strategy significantly enhances your chances of profitability compared to accepting a setup where you need to be right 75% of the time just to avoid losing money.
Here’s an analogy to clarify: Betting on odds-on horses may lead to frequent wins, but the losses can be devastating to your overall profits. Instead, aiming for a balanced approach where your potential gains equal your potential losses can lead to more sustainable success.
This concept is essential for new traders to understand, as mastering the risk-reward balance is crucial for long-term profitability in trading.