Money Management

The sport of kings.
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rubysglory
Posts: 309
Joined: Thu Nov 04, 2010 7:02 am

Euler wrote:When I watch struggling traders it generically feels to me like they are over thinking things, are often too fearfull of downside and not getting enough money through the market. That's what I can see at the moment.
The losing strategies wanted thread posed some interesting thoughts about money managment. Quoting Euler from this thread as a point of introduction, I thought this was worthy of an additional discussion on it's own.

I have tried to trade in the true definition of the word, but with time have found that my niche is in also utilising my skills as a handicapper. I am a hybrid trader. I trade my price line against that of the market and back and lay accordingly. I generally do not dump the market whilst following a trend or concern myself with WOM charts etc.I am generally not worried about getting enough money through the market as the pools are usually sufficient for my purposes. In doing so, the amount of my stake, although varied, is directly relative to the price traded. My stake is technically static. What interest me is in learning to understand what sort of staking or money managament plans (if any) others implement - both traders, hybrid traders and players alike. How do others determine how much money is appropriate to push through the market at a given price line ?

rg
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

I think Euler means traders need to simply turn over many trades through the market rather than sat waiting on a specific trade with a fixed amount and worrying about it. So if your playing with a bank of 50 pounds for example, put through 15-25 trades at 2 pound a trade instead of 1-2 trades at 25 and sitting waiting on them?
psycho040253
Posts: 109
Joined: Thu Mar 10, 2011 9:29 pm

At long last - something that I can really get my teeth into.

Before I start, I would like to state that I am a straight layer and I rarely trade. However, the principles below should still apply.

Regardless of whether one trades, backs or lays, sometimes you will win and sometimes you will lose WITH A GIVEN STRATEGY. This gives rise to a strike rate. The strike rate (for newbies) = number of winning bets divided by total number of bets placed.

This will give rise to a theoretical longest losing run (LLR) that one is likely to encounter.

The LLR is given by log (number of bets placed) divided by minus log (1 - the strike rate).

For example, if 100 bets have been placed and the strike rate is 0.8, then the LLR = log(100)/-log(1 - 0.8) = 2.86.

Please note that it doesn't matter whether log to base 10 or natural logs are used as long as you are consistent.

Please also note that the strike rate in the above formula is quoted in decimal rather than in percentage form i.e. 0.8 as opposed to 80%.

So, if we place 100 bets using a system with a strike rate of 80%, we will encounter a max. LLR of 2.86. Let's round up the LLR to 3. Therefore, in theory, if we allocate one third of our betting bank to each bet, when we encounter the LLR, we will completely lose our bank. Therefore, we must allocate less than one third of our betting bank to each bet so that when we encounter our LLR, we will still have funds left in our bank with which to recover our losses.

OK, that's the theoretical world dealt with. Now to the real world.

The actual LLR that you are likely to encounter is likely to be greater than the theoretical one.

Why?

For brevity's sake, and this post is quite long enough, let's just say that it is due to probabilities and margins of errors and leave it at that.

But that's not the end of the story.

It isn't just the LLR that can decimate a bank. A number of losing runs which are shorter than the LLR but which occur close together can do far more damage to the bank than encountering the LLR.

To mitigate this, we must multiply the LLR by a factor. That factor reflects the belief that you have in the system and how much risk you are willing to accept. The more faith in the system that you have and the more risk you are willing to take, the lower the factor. The less faith that you have in the system and the less risk that you are willing to accept, the greater the factor.

I use a modular laying system. Some modules, I really trust. However, there are other modules that I have less trust in due to the low numbers of bets placed due to their low frequency.

With the trusted modules, I use a factor of 2. With the less trusted modules I use a factor of 3 or 4, depending on which module I am using.

So, if I am using a trusted module, I divide my betting bank by the LLR multiplied by 2. For example, if the LLR = 4, I divide my betting bank by 2 x 4 = 8. This gives me my bet liability. To calculate by laying stake, I divided my liability by the betfair odds - 1. So, if the betfair odds are 4.0, my stake is betting bank divided by (4 x 2 x (4 - 1)) = betting bank divided by 24.

If I am using the least-trusted module, I divide my betting bank by the LLR multiplied by 4. For example, if the LLR = 5, I divide my betting bank by 5 x 4 = 20. This gives me my bet liability. To calculate by laying stake, I divided my liability by the betfair odds - 1. So, if the betfair odds are 3.0, my stake is betting bank divided by (5 x 4 x (3 - 1)) = betting bank divided by 40.

Please note that as the number of bets that you have placed increases, so does the LLR. This is a fact that a lot of people fail to realise and is one of the main reasons why most people lose long term.

Please also note that different strategies may have different LLR's due to the different strike rates and number of bets placed. Therefore, for example, if you use 3 different systems, you will need to calculate 3 different LLR's.

Psycho :evil:
Last edited by psycho040253 on Tue Jan 10, 2012 9:53 am, edited 2 times in total.
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LeTiss
Posts: 5489
Joined: Fri May 08, 2009 6:04 pm

Interestingly, I have never seen BA or Peter make videos or references to the importance of money management. It's a very important part of successful trading, especially for novices looking to climb the ladder
steven1976
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Joined: Tue Jan 19, 2010 6:28 am

On peters course the first thing he discusses is money management or at least it was when i was on the course. In my personal opinion it came a little early in the day back then as i was looking more to get straight into how BF and trading worked, as I was new to trading at the time. The money management part went well over my head for a long time and in my opinion it is one of the hardest and most important lessons to learn.
steven1976
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Joined: Tue Jan 19, 2010 6:28 am

Maybe not to learn, but to appreciate and put into practice consistantly
luissuarez
Posts: 18
Joined: Sat Aug 20, 2011 11:18 pm

steven1976 wrote:Maybe not to learn, but to appreciate and put into practice consistantly
When I first started trading this was probably my biggest fault, I would trade pre match on football but if my trade went bad would let it go in play and wait for the odds to come back to me. I got away with it a few times but all it took was the painful lesson of an early goal and I have never made that same mistake again. It is far easier to win a small loss back on your next trade than it is to win your whole stake back. The most important lessons including money management I have learnt the hard way (some times I feel this can be the best way to learn as it stops wishful thinking getting in the way)
Zenyatta
Posts: 1143
Joined: Thu Mar 11, 2010 4:17 pm

rubysglory wrote:
I have tried to trade in the true definition of the word, but with time have found that my niche is in also utilising my skills as a handicapper. I am a hybrid trader. I trade my price line against that of the market and back and lay accordingly. I generally do not dump the market whilst following a trend or concern myself with WOM charts etc.
rg
Yes, same with me, my niche is the very early market or In-Play, I really wish I hadn't wasted so much time trying to do something I'm useless at (trading close to off), which cost me a fortune.

I should simply take out my line and stick to it, and if anyone moves the market against me, rather than stops I should double down, unloading even more cash on my selection. The total polar opposite of standard trader advice :D
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

Zenyetta wrote "I should simply take out my line and stick to it, and if anyone moves the market against me, rather than stops I should double down, unloading even more cash on my selection."

Sounds like gambling. Surely if you double up if someone is using their bank to move the market theywill simply recognise your new position and go against that?

Dont get me wrong, Im very much with you that the markets are very manipulated and the traders with the big pots can simply realign the odds as they please in all sports, but by doubling up you are surely playing into their hands. I personally find it easier to use smaller positions and play along with their traps as they do not want to expose themselves to smaller positions. For me it works much better me putting through the market 10 trades of 10 pounds rather than a single position of 100 pounds. Im quite happy to trade 12 mins out at the front of the queues with small trades as to larger stakes 3 mins out when the market is more active and the larger stakes can go unnoticed.
Zenyatta
Posts: 1143
Joined: Thu Mar 11, 2010 4:17 pm

steven1976 wrote: Sounds like gambling. Surely if you double up if someone is using their bank to move the market theywill simply recognise your new position and go against that?


I will wait until they've pushed the price out a big number of ticks, luring them in with small stakes then hitting them with a big bomb when I can get a great price. They can of course keep pushing the price out, but then I simply ignore their moves. Eventually, as the off approaches, and bigger and bigger amounts are going on, the manipulators will run out of bank, and the price will start going back my way.

Remember, I have over 18 months of data showing I can correctly predict the price direction of my selections (from early line to final SP), with an accuracy of 75%. So I am happy to for anyone to attempt to oppose me.

Eventually, at the off ( SP), the manipulators will have been taken to the cleaners, since even the bomber himself can't stop the price approaching its true (efficient) value at the off.
rubysglory
Posts: 309
Joined: Thu Nov 04, 2010 7:02 am

steven1976 wrote:Sounds like gambling. Surely if you double up if someone is using their bank to move the market theywill simply recognise your new position and go against that?
Interesting - When such a strategy is employed in the financial markets (unit cost averaging) it is called investing, elsewhere it is called gambling.

rg
Iron
Posts: 6793
Joined: Fri Dec 11, 2009 10:51 pm

Depends who you speak to.

One of the market wizards, Paul Tudor Jones, has a sign on his office wall that says 'Losers average losers'...

Jeff
rubysglory wrote: Interesting - When such a strategy is employed in the financial markets (unit cost averaging) it is called investing, elsewhere it is called gambling.

rg
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rubysglory
Posts: 309
Joined: Thu Nov 04, 2010 7:02 am

steven1976 wrote:On peters course the first thing he discusses is money management or at least it was when i was on the course.
What is discussed with respect to money management at these courses ?

rg
rubysglory
Posts: 309
Joined: Thu Nov 04, 2010 7:02 am

Based on available feedback is it fair to assume that most traders give money management nil or limited formal consideration ?

rg
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