Trading The Random Walk On Betfair
Randomness is a massive part of Betfair market price action.
I was asked about random trading only last week. One of the greatest books on trading contains no practical advice about the markets whatsoever but still describes price action and better than a thousand hedge fund managers ever could. The Drunkard’s Walk by Leonard Mlodinow details how virtually all aspects of life are ruled by randomness.
If we are honest with ourselves randomness is a massive part of Betfair market price action. It’s one of the principal reasons that almost every backtest fails miserably under real market conditions. Didn’t know you could backtest a trading strategy with Betfair data, huh? I’ll let you in on that one next week.
But frankly, I consider tactics to be much more important than strategy when it comes to making money trading the Betfair market.
My favorite tactic is where I will enter a trade at one level and if it goes against me I will add to the position allowing me to exit the trade at the original entry rather than the original take profit.
I know. I know. The horror! I am breaking one of the sacrosanct rules of people who never-actually-trade-betfair-with-real-money-but-like-to-peddle-trite-theories-of-risk-and-reward. Yes, of course, I am increasing my risk and capitating my reward. Yes, of course, such tactics require a much higher win percentage to be profitable. And yes, of course, they can lead to disaster if you don’t properly balance the ratios. But instead of having a religious argument about risk and reward just do the following.
Set up BfBotManager in simulation mode. Write a strategy to place 50 random trading trades with 5 pip stop and 10 pip take profit and then place another 50 trades with 10 pip stop and 10 pip profit, then another 50 trades with 20 pip stop and 10 pip profit. You’ll notice something interesting – the win/loss ratios are not proportional. At 5TP/10 stop, you could lose 90% of the time but at 20st/10tp you may win 55% maybe even 60% of the time. You will still lose, but much less and it will take much longer than through the “traditional” way of trading.
Why? Because of something called path dependence. In the la-la world of trading gurus where trend spotting is easy (once it’s already happened) and price moves linearly from point A to point B, using 2-1 risk reward ratios is…obvious! But in the real world where every Betfair price tick is subject to random variables the path is never smooth nor linear. Add to that the fact that the market, like a skilled poker player, is almost always trying to trick you into the wrong move and your accuracy at any given price is actually more like 25% for to 75% against versus the 50%/50% that is commonly assumed.
That’s why single entry tactics are the height of arrogance, especially in Betfair trading where the stops are small and the margin for error is tiny. On the other hand, random trading as a Betfair trading tactic is designed for the maximum possibility of success in a real market environment that is more like the undulating waves of the ocean, than the hard certitude of a concrete floor. Over the years these tactics have made clients more pips than all of our other trading strategies combined. Why? Because randomness rules.