Scared money

When I used to play poker in one of London's casinos you would often hear the phrase "scared money". The phrase refers to the cautious players, beginners etc. who didn't want to risk too much money. These players would play with a very small stack of chips in front of them and when it was gone they would walk away. They would do all they could to protect their little stack of chips and that meant dropping hand after hand until they had a monster. All I had to do was drop my hand whenever they kept theirs.

My bankroll for such games was always a lot larger than my opponents. They would buy in for £50 or so. I would buy in for £500 or more. There was never any intention of using the full £500. I just wanted everyone to know that I had them covered. The value of my stack was immediately forgotten as I tried to bully people out of a hand. Poker is more about finding the right players to play against than anything else. Whenever I went to the casino I would say, "Hello" to my acquaintances, as I passed them by, heading for the easiest table I could find. Usually, a table with tourists or people I knew that had just started coming to the cardroom and were still learning the game. But what has this to do with sports trading?

A common question from beginner traders on the forums is, "What size should my bankroll be?" Alternatively, they will say, "I am going to start with £50 and see how it goes." Immediately, I know their money to be scared money. A common outcome for a beginner's small bankroll is that it will dwindle away because the fear of losing the bankroll doesn't permit them to trade effectively. When they start trading, all they can see is a zero, sometime in the future, at the bottom of their spreadsheet's profit and loss column. From that moment on, the beginner trader will be more concerned with not losing money rather than winning money. Any small reversal against them and they are out for a loss, only to see the market swing back in their favour.

Before you determine a bankroll size, you need to determine a winning system. That system will have an expectation or expected value, in other words, how much you can expect to win per £1 bet. Of course, you cannot expect to make exactly what is expected. Indeed, a winning system can lose for while and a losing system can appear to win before reverting. There is no real answer to the question, "How big should my bankroll be?" Your bankroll should be big enough to cover the volatility of your trades. Only experience and a history of previous trades will give you a value for the variance of your returns. Whatever bankroll you decide upon, its value should be forgotten. Your prime concern now is to trade to win and never not to lose.

1 comment:

  1. I'd agree, most of them just go in with the mentality they'll lose it and those posts generally attract other losers to come along to say how many banks they'd lost just to reinforce that mentality :)

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