With a new £101,000 challenge in place I thought I'd put some new bankroll rules into action to help me achieve the new goal. Proper bankroll management is a critical part of being a winning trader. Afterall, you're going to make nothing if you blow everything first.
Discipline underpins the whole bankroll issue. Retain that and you'll always be in the game. If nothing else that will always give you the opportunity to be a successful trader. A well thought out bankroll strategy gives you the chance to be a winner. Keeps you liquid. It's a crucial first step in being a consistent long-term winning trader.
So what are my new bankroll rules? At their most basic they are this. I will operate with a £12,000 Betfair balance. The most I am willing to lose on an individual event is £1,250.
Before I go into that in a little more detail regular readers will probably notice the similarities to my original bankroll strategy as well as the one I trialled for the Cricket World Cup before adopting it full time at the end of the tournament. The basic principles are the same. The only real difference is the size of the sums involved.
As i've discussed with some readers I'd actually upped my operating balance again since adopting the post Cricket World Cup rules and peaked with around £17k in my Betfair account. By that time I was operating to a max loss of £1.5k from trading as well as any losses from outright bets that I considered value in running. It was at that point that disaster struck. I'd got ahead of myself a little and following that loss I decided not only to stop the outright value bets but also that I needed both a new challenge (for focus) and to spell out my new bankroll rules. (for discipline)
So. A £12k operating balance with a £1.25k max loss per event. Small fry to some. But big numbers from where I started with just £1k in total. That £12k and £1.25k tell their own story too. They reflect the way I trade. Let's say I used all that £12k and made £1.4k on an event. I'd consider that a result. But another trader might use just £2k and make a £2k profit. Assuming a run of the mill trading event what differentiates us here is attitude to risk. I'd be willing to place a small wager that my long term results would be more consistent than the other traders. That my overall losses are smaller. That I don't experience as many highs and lows. (Well, either that or they're a far superior trader!)
Of course, the real point here isn't about who makes what profit. But how. I might have £12k sat in my Betfair account. But there's no way I'm going to use it all until I'm pretty sure I know the result.
An example....
Team A and Team B are evens the pair at the start of a cricket match. The reality is £12k balance or no £12k balance my biggest liability in this situation is rarely going to reach £1k. Which given I can cut a loss if things move against me means perhaps a £150 - £200 all red book if I hit a stop loss point.
Now, it's later in the match. Team A are on top and their price is 1.1. For the sake of a straightforward illustration let's say my book stands at £750 green Team A and a level £0 Team B. In this situation I am far more willing to have a larger liability on Team B than at the start of the match. If I consider the price warrants it I will now happily bet £5k on Team A. This gives me a book of £1.25k green Team A and £5k red Team B. Of course, if the price moves against me I can bail from the £5k back. Each tick it moves against me costs me £50. But if I chose my spot to make the bet well I will have plenty of time to bail here and still make a decent profit. I just have to pick the point I will get out at and stick to it.
What I'm effectively doing then is building up a green during a match with a limited liability approach before trying to maximise my position at the end of the match. Bet £1k at 1.1 in this position and you add £100 to your winnings. Bet £5k and you add £500. Repeat this 10 times a month and you're £4k better off. The effect this approach has had on my own trading is clearly visible in this graph. Despite the fact that there were simply more events to trade you haven't got to be the sharpest tool in the box to realise I increased my operating balance from £1k to £4k in the March to April 2007 period.
Of course, I'm not saying I'm just going to lump on short odds. Anything but. Picking the right situations is crucial. And then the amount of that £12k I will be willing to use in a lump on situation will depend largely on my exisiting book. Back to the example of Team A at 1.1 near the end of that cricket match. I'm not going to lump £5k on a 1.1 shot if I have a book of £50 green Team A and level £0 Team B. If the price moves just two ticks against me I'm staring at an all red book.
The point is having that £12k there gives me the opportunity to maximise my green from situations where my book allows it. Crucially it also gives me the chance to be involved in two events at once. Say a slow moving test match and an ODI. It enables me to run sizeable exposures in both games. In the past I've found I'm missing out on opportunities to make money simply because my operating balance has been set up for a single event only. I've estimated £12k will allow me to comfortably trade two concurrent events within my max loss limit. I'll see how it goes but if I find I'm still missing out I may go ahead and increase my operating Betfair balance to £15k.
So there you have it. My new bankroll strategy. Of course, I've really only covered the basics but the black and white amounts are there as well as some of my more general management principles. The prospect of losing my new max loss of £1.25k isn't enthralling but looking back through the 18 months or so I've been keeping the blog I've had just 3/4 max losses. The reality is I tend to just cut losses and leave a match if things keep going wrong.
Concentrating on maximum losses, while necessary, is also a little pessimistic too though. So on a more positive note I'll be keeping my fingers crossed and hoping these new rules keep me in the green and on the road to that £101,000!
6 comments:
Great post mate - very informative and I look forward to reading about your journey to £101k!!! The £12k maybe small fry to some but it is big fry to me at the moment :-)
Keep it up and best of luck!
BFT, very sensible approach and putting in appropriate stop loss points helps take the emotion out of taking a loss (cardinal sin of many is letting losses run and taking profits too early). My question regarding your strategy is not lumping on where you haven't built up a green to play with. Let's say for example you are small red the pair but team A now look certain winners and the price is value. I would suggest you still bet team A even though a price drift will result in all red - you don't have to take the red unless it hits your stop loss (not necessarily max stop loss, or anywhere near for that matter). Under this strategy you just need to clearly calculate your get out point in terms of price and/or adverse event occuring (say change in playing conditions and a lost wicket). The difficulty with this approach though is to maintain clear thinking when you are looking at an all red and events haven't hit your exit point - suddenly the ball seems to be moving sideways with huge swing! Sorry this is not very concise but i hope you get the drift! Good luck and really enjoy the blog.
Hi BT,
Great post and good luck with the new challenge!
All the best,
Mark
10% bank per event?
are you:
a) nuts?
b) someone with a lot of banks?
c) in need of a new hat?
Prek.
(Still the best site out there, mind.)
Anon> I knew someone would ask that! I toyed with including my thinking in the initial post but thought it was already long enough but am happy to try to explain my thinking here.
From the start though let's acknowledge that my approach might not be "right". It's what I'm comfortable with and what works for me. I guess at the root of my decision not to lump that £5k on, value or no value, when I only have a small existing green instead of a large one, is I want to finish the match with a green book. My approach has always been one of small consistent wins. I'd rather have a small win than risk blowing the profit from what might be several hours trading for the sake of one oversized trade at the end of an event that could go wrong.
In a nutshell that's it. I'm sure my thinking can be explained through Prospect and Cumulative Prospect Theory. Whether it's the "correct" approach I don't know. The summary from Tvede on this page that: "We have an irrational tendancy to be less willing to gamble with profits than losses" probably sums it up pretty well.
Prek> I'm none of those! 10% does sound crazy at first doesn’t it? But it’s a misleading headline figure. When you look at it in more detail you may find you believe, as I do, that it is in fact a very conservative approach. Let me explain…
1) I'm a trader not a punter. That is, I have lots of little bets on an event outcome rather than just one main one as a punter does. If I was a punter I would agree using 10% of my bank on each punt would be very risky - and would almost inevitably lead to my going bankrupt. This clearly is not what I am doing though. Let's look at the example I gave in the original blog entry. Where I have that max £1k liability at the start of the event mentioned. In reality, in the worst-case scenario, this might equate to a £150 - £200 all red book if I hit a stop loss. And usually considerably less. Looks a bit different now doesn't it? Essentially in this example I'm willing to lose a maximum of 1.66% of my bank on each of my punts. Not 10%. To lose 10% I would have to lose at least several large bets in row that forced me to exit at a stop loss. Not just a single bet like a straightforward punter.
2) Context. How likely is this scenario of losing several large bets in a row? Well, I’ve been writing this blog for over 18 months. I’ve traded maybe 750 events, to varying degrees, in that time. During this time I have suffered 3 or 4 maximum losses. Call it 4 and 750 events. So I suffer a maximum loss just over 0.5% of the times I trade. Given the historical profit made during those 18 months I can afford the hit once in every 200 or so events.
3) That 10% headline figure is actually more conservative than how I was operating successfully with my last set of bankroll rules – which in itself was more conservative than my original bankroll rules. How and why? Well, as the links in the blog entry show, I started with £1k with a max loss limit of £500. ie, 50%. I then switched to a £4k bank with a max loss limit of £750. ie, 18.75%. I now use a £12k bank with a £1.25k max loss limit. ie, 10.41%. In terms of operating bankroll this is my most conservative approach yet.
4) Your question of additional bankrolls. Well no. I don’t have these. What I do have is my profit to date, minus wedding / honeymoon expenses and operating bankroll that is on deposit with Betfair, sat in a high interest account. If I lose £500 then yes I will replenish my Betfair balance to £12k. So yes, I do have a reserve of money. However, I rarely dip into this. In the 18 months or so that I have kept the blog I have had one losing run of three days. So, especially in recent months, I’ve rarely needed to deposit more than a very small fraction of my profit to date following a loss. I simply don’t envisage having to find a new £12k operating bankroll. To do that I would have to suffer 10 max losses on events in a row. With 3 or 4 max losses to date from around 750 traded events I’m pretty confident that 10 straight maximum losses in a row simply would not happen. Losing two in a row would have alarm bells ringing and me no doubt concluding that I have lost control / discipline, am chasing, and it is time for a clear break from trading.
So that 10% headline figure can be very misleading. For me it makes a very conservative approach look reckless. Perhaps an example of there being lies, damn lies and statistics!
Post a Comment