ROI (Return on Investment) is a subject that comes up frequently on betting forums. How do you calculate your return? This is an important question as only then can you determine if your investment is worthwhile or not.
There are many ways of performing the calculation and each one has its pros and cons. The simplest is just the percentage increase in your bank roll at the end of each day. This is an easy calculation to perform. If your bankroll is £100 and you made £10 profit today then your ROI is simply
ROI = Today's Profit / (Today's Bankroll - Yesterday's Bankroll)
In our example this would be 10 / (110 - 100) = 10%.
The problem with this is that it does not take into account your investment activity. You may have invested the full £100 or you may have invested £5 of your bankroll in a back bet. If the latter then you really made 200% ROI on just £5 risked.
The second way of calculating ROI is by way of turnover. This is the measure of actual money being invested. In our example, turnover was just £5 risked in a back bet. Alternatively, you may have laid a bet of £5 at odds of 3.0. Now, if you lose then you will have to pay out £10. You liability is £10 and so your turnover is also £10.
ROI = Today's Profit / Total Turnover
This brings in the concept of drawdown, the maximum possible loss from an investment. In our previous lay example, assuming you do not trade off any liability with a back bet then the maximum you can lose is £10. Your maximum possible drawdown is £10. However, if you are a trader and you intend backing and laying the same selection then things are different. Imagine an example whereby you back a horse for £100 at 1.90. Your maximum drawdown is £100 if you forget to lay off liability and the horse loses or £99.81 if the odds go out to 1000 just before the end of the race and you remember to hedge.
Of course, you would've hedged much sooner. Let's say you had a 10 tick stop loss and will hedge at 2.00 for a loss of £5.00. What is your ROI now? Imagine the trade was a bad one and the odds lengthened so you closed out for the £5 loss. You risked £100 to back the horse and then laid the horse for £95. Did you really invest £195? I don't believe that you did. At any one time your maximum drawdown was £100 so you lost £5 on £100 risked. An ROI of -£5.00. This is why I use the first bet to determine my maximum drawdown. The second bet is just to close the trade and does not increase drawdown. In fact it lowers it.
With multiple horses backed and laid in a race you can calculate the volume weighted average price for all selections. Betfair does this for you in your Betting Profit and Loss report. You will see a back and lay subtotal, which takes into account that any money laid on one horse can be bet on another horse at no risk to yourself. Either the back or lay subtotal will be positive (depending, I believe, on the order in which you placed your bets). I take the positive value as my total risk for the event and divide it by the Net Market Total to give what I believe to be a good representation of return on total risk.
ROI = Net Market Total / (positive)[Back or Lay Sub Total]
