The problem with Betfair "scalping"

In a previous post I detailed my problem with so-called "scalping", a hit and run approach to trading on Betfair. The approach is a valid one under the right conditions. A market has to be trending or oscillating and doing so during both legs of the trade. 

The following video is a more honest video than most scalping videos that I have seen. In the video we see a trader getting into difficulty before eventually winning. There are many videos on YouTube where you will only see the trader losing. It takes a brave man to admit that he failed in public. You will need to go to the 11 minute mark to see the trade as the first eleven minutes are just an introduction to Betfair for beginners.


The problem with the trade is that "in his experience" the trader decides to keep alive a losing back bet and indeed make more back bets to recoup his loss. This is what we call in trading "doubling down", a Martingale strategy. As we know, a Martingale is employed to win back losses by increasing the stake so as to turn a losing bet into a winning bet. Often done when the edge to the bettor is a negative one. In this case the trader is already losing, his decision to make the initial trade had a negative edge because it went against him.

The trader was fortunate in that the price turned again and he made a profit. How did he know that the price would turn again? He didn't, he got lucky. Price movements are a random walk so no prediction about price movement can be made. This is an example of gambler's fallacy. Another example would be betting on red after seeing a roulette wheel produce nine consecutive black numbers or a person bets on tails after nine consecutive heads having being tossed.

Our trader was fortunate because this was a price fluctuation caused by scalpers jumping on the bandwagon. The short-term price movement is created by scalpers reinforcing the move through their actions. The first scalper on the bandwagon gets the profit and those who are late get less and less profit until all the scalpers have placed their bet. The later scalpers get little or no profit and then the momentum fizzles out before the price corrects itself and then scalpers or swing traders looking for the reversal move in. The original scalpers who have not placed the closing leg of their bet now find themselves in a negative trade as the price turns against them. The only skill is being the fastest to the draw. 

What if new information had entered the market revealing that the horse was now much more unfancied than before so that the price would not turn back? The trader would lose a lot more than cutting his initial loss. I see this time and again. A trader gets lucky, which reinforces a bad strategy in their mind. There was no fundamental reason for the price to snap back as the trader is merely scalping the numbers and knows nothing about the horse in question. Technically the trade was a bad one as the initial trade had a negative edge and the trader employed a Martingale (which no sensible trader should ever do) to get his money back. A less risky strategy may have been to scratch the initial trade and then place another trade when the price was higher. There would still be no reason for the price to drop but at least the risk level is decreased. 

You sometimes hear sports traders using the financial market term "reversion to mean", whereby they expect a price to fall back to where it was a few moments earlier. However, I do not believe that mean reversion is applicable to sports markets in the same manner as a financial market. Financial markets are long-term markets with temporary fluctuations around long-term trends. A sports market is short-term and aggregates new information at a much faster rate. If the price moves in a sports market then there is a very good fundamental reason for it to do so and it is equally likely not to mean revert.

The only saving grace for the Betfair scalper is the "scratch trade". In the ideal scratch trade the trader believes a price is about to trend in one direction or the other. The trader will back or lay accordingly and if the price moves in the direction they believe it to be heading then they will close the trade with one, two or maybe more ticks of profit. However, if it appears that the market is going the other way then the trader will make an opposite bet at the same price as the original bet thus realising a zero loss and the trade is scratched. Is it possible to be the perfect scratch trader, always making winning scalps but never losing? I doubt it.

If a scalper is 50% successful then for every tick of profit he also loses a tick on losing trades. Overall he will lose because a a tick loss loses more than a a tick win. There is also commission to be paid on winning trades, which also eats into profits. A scalper needs to have more ticks of profit than losses to overcome transaction fees (tick win/loss difference, commission, equipment and power costs). If a trader is merely guessing (with feeling rather than logic) then it is hard to see how a scalp trade can do better than 50%.

In the video we sawa trader who does not scratch trade but instead sticks with their belief and doubles down. The skill in scalping is in understanding the psychology of other traders, not in predicting price moves or getting "a feel for the market". Being the quickest to the draw and gaming the market is the key to scalping success.

8 comments:

  1. Well No, he didn't get lucky at all.
    He used his experience , skill and judgement of many thousands of races he was studied to help him decide the probable short term direction of the price.

    He has worked long and hard to achieve this level of understanding how the pre race markets work.

    And, if you rerun the vid and listen real careful now, you will hear him say this is what he does for a living. Not what he intends to do.

    I like your blog over all but you selected the wrong video and trader to make your point.

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    1. After reading the rest of the blog I realised that the trader is now full-time.

      However, I stand by the rest of my words. There can be no probable short-term direction to a random walk.

      As I mention in my articles about scalping there is short-term momentum as scalpers jump on the bandwagon.

      The short-term price movement is created by scalpers reinforcing the move through their actions. The first scalper on the bandwagon gets the profit and those who are late get less and less profit until all the scalpers have placed their bet.

      The later scalpers get little or no profit and then the momentum fizzles out before the price corrects itself and then scalpers or swing traders looking for the reversal then move in.

      The original scalpers who have not placed the closing leg of their bet now find themselves in a negative trade as the price turns against them.

      The only skill is being the fastest to the draw. Prediction plays no part as there is nothing to predict.

      And, of course, we never see traders posting failed trades as that would damage the ego of the scalper.

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  2. Hi James,

    Had a couple of people email me about this post, while some of your posts i agree with having have a read through i don't think this is a particularly fair post about the clip.

    "The only skill is being the fastest to the draw. Prediction plays no part as there is nothing to predict." - while you're correct in some instances this is possible, its not always the case and in this clip it's not about scalping, its about informing others what is possible with their betfair account..... hence the title i gave it!

    I did actually have an opinion on what was going on other than 'fastest finger first', when i say 'potentially i think this is going to come in' and 'i dont really believe its going to be their long term' i thought it would be clear i wasn't just hoping to scalp.

    Anyway keep up the good work with the posts.

    Cheers

    Caan

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    1. Thanks for the comment. I gave myself a deadline and yours was the first video I came across. I will replace it when I find a more suitable video.

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  3. I tend to agree with both sides of this debate.

    Caan may be right in that he had an opinion for where the second move would be (down in price), and his experience told him that perhaps.

    However that is not clear in the video - all we see is the doubling down as described by James.

    I myself have fallen foul of doubling (or tripling in fact) on many occasions with more blind faith than real knowledge. This is a huge trap for many traders.

    One logic is that of course a higher price is more likely to fall next, as it is literally paying out more to the backer of course. But we all know that prices can keep moving in only one direction (e.g horse that has bolted to the start).

    What strategy would the trader in this video recommend in that case?

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    1. An excellent comment.

      I have never heard in any dialogue attached to such videos the trader muttering that they just saw something on the TV or heard something on Internet radio about a given horse, which warranted what they did.

      A lot of the time it just looks like divination and survival bias video. I can't believe that experience can tell you anything about the random walk of prices (with some periods of momentum).

      And before another commenter chimes in with "You don't believe that 'scalping' works. It does etc." I know that trading along these lines works but only when backed with logic and not a hunch.

      I firmly believe that the best traders have the best hardware/software/ISP combination that they are first on a move and make their profits from those traders with the worst hardware/software/ISP combination. So-called scalpers are in fact noise traders. The good ones feed off the bad ones.

      Yes, there are probably traders who get live video/radio feeds that they can make educated trades with before the start of the race but I have not yet seen a video to back this up.

      Maybe one of our "experts" can show an example of this.

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  4. Actually he is not doubling down. Notice the small stakes?
    His real stakes are considerably higher so what, in fact, he is doing is averaging himself in to the position.
    Sure, if you have a 10k acct and lay a grand on 1.3 on every price down to 1.1 then sure, suicidal but that isn't what he's doing.
    Lay 100 at 4.0 then another 100 at 3.0 you're potentiall in a 4.0 trade at 3.5

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    1. You also have the potential loss of 200 at odds less than 3.5

      If a price is trending against you then there comes a time to close out for a small loss rather than to keep throwing more money at a losing position.

      I don't like averaging down because of that - see http://www.betfairprotrader.co.uk/2013/09/averaging-what-is-it-and-does-it-work.html

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