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.