Friday, 24 July 2015

Managing profit expectations

One of the common mistakes of novice traders and bettors are too high expectations of their profit. I can remember that a guy offered me a ROI of 35% (a month)! Even without compounding you would make - on a yearly base - a profit of four times your bank. Let's say you have 50'000 Euro on your account, this means you make an income of 200'000 Euro a year (without considering the commissions). It sounds delightful, but it's not very realistic.

One of the most famous and successful bettors (he earned millions with betting), Patrick Veitch, made an ROI of 16%. Yesterday we talked about tipster services. Most of them offer unrealistic profits, which they never can deliver. A very good trader/tipster makes 3-4 units a month (let's assume that one unit is at most 2% of your account... so it's 6-8% per month). You also have to consider the yield, the ratio between the stakes and the profit. A long term yield of 10% is not easy to reach. Let's say you risk 500 Euro, which is equal to 1% of your bank, per trade (in smaller tournaments here already start the liquidity problems), you earn in average 50 Euro. If you make 100 trades a month (a realistic number as a tennis trader) your profit will be 5'000 Euro. So you would make a ROI of exactly 10% a month. To be honest, I think this is still quite a high target and a very impressive performance.

It shows that you need a realistic target settting. If your expectations are too high, you will not succeed. You will always search for a system, which doesn't exist.

At Sunday I will take a look on the performance of the first week with the new approach. Managing expections is definitely also a topic I have to consider. Or how Conficius told: "It does not matter how slowly you go as long as you do not stop."


6 comments:

  1. Spot on! That´s where most people got it wrong, if someone states in a website that he has a strategy that presents a mean yield of 1% per trade, nobody will be impressed. The thing is, that person can make a lot of money with that strategy specially if it is a more or less an high-frequency trading one. In other words, if over a match you can repeat it several times, 1% per trade is more than enough to make a living out of Betfair.

    Ps: of course that strategy must be scalable to a certain degree, for my statements to be true.

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    1. 1% yield can be lucrative if you can copy&paste and have a high frequency. Is more or less like buying a banana for 0.09 cents and sell it for 0.10. 0.01 margin is not much, but you can do this with very high volumes it works.

      I am not so sure if you can make several 1% yield trades during a tennis match. There will be lost ones too, but like I wrote more than once... everybody has to find his own way. Some traders probably even can make money with backing 1.01... sometimes it can be value, for example when I would play against Roger Federer. :-)

      The numbers I mentioned (10% yield with a normal volume) seem possible, but are a challenge. Everything above seem not that realistic for me. For sure every tip service tells you that he/she earns a fortune. I would say that 80% are crap.

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    2. I may be wrong, but to the best of my knowledge I don´t believe it is possible to have a high-frequency strategy with a mean yield of 10% using a four-digit stake (or close to that) without some technological advantage. Using small stakes is a lot easier to get in and out of the market and it may be possible to reach those values, but trading large is a totally different beast. From my personal example, my strategies changed completely when I was scaling up as what worked for small stakes didn´t work for bigger ones.

      I find this topic very interesting and one of the reasons why I told you earlier to trade more in your sessions. Like The Alchemist told, in the long term it may not be about the higher ROI. From my point of view, the two most important features of a trading strategy are: the potencial to be scalable and its repeatability.

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    3. Yes, you are completely right. It's another game with big stakes. Often you find only bad value for larger amounts.

      It's about taking step by step. First you have to learn the basics and for that small stakes are perfect. You have to reduce the complexity of trading. Like mentioned in the book "trading in the zone" is difficult, because humans are used to limits and rules. At trading you can do basically everything. That's difficult to handle.

      Right now I am working mainly on my entry- and exit-points, and so I prefer to go for quality and not quantity. Like we discussed, it doesn't mean that you make the highest proft with this approach. Alchemist mentioned it... a better ROI doesn't mean that you earn more. At the moment this number is quite important for me for testing the strategy under "perfect conditions". In the future I try to make more trades and will accept a worse yield. I liked the example of Alchemist about poker. It's exactly like he described.

      To earn big money you need exactly the things you mentioned, scalability and reapeatability. Like I wrote, it's probably a nice strategy to back Djoko always over 2.00, but this scenario you have ten times in a year.

      Overall I share your point 100%. I think at tennis you have the possibility to scale up and repeat the trades quite often. Fore some reasons is the best sports to trade beside horses and cricket. It's just a long way until you are under the 0.1%, which earn good money. It's even hard to be one of the 2.0%, which make profit over long term. Probably I am at this point now. I feel that I can succeed with the new approach, but to make the next step (from a small to a big fish) it needs a lot more experience and knowledge.

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  2. For sure volume is essential. That's what I was always told at Poker and listened to players better than me. I knew a guy who had a 6% ROI (I had 11% ROI), however he played many more games then me, played 4 tables at a time Headsup. Even though his ROI was lower (because he chose situations with smaller edges then me, but still an edge long-term), he was making a higher hourly rate $ and a lot of volume..and in poker that's what matters really.

    I seen a guy who has something like 3800 tips already with a 2 or 3% yield, so a lot of variance but this has been recorded in like 3 months. It's not possible for someone following to be able to follow that many tips unless they are following that person full-time.

    So whilst volume is imporant, it also has to fit your requirements, be realistic and be something what you can achieve.

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    1. Yes, in the end you can't pay your bills with the yield. Probably you would have a good yield, when you always back Djokovic at 2.00 (during the matches), but this scenario occurs only 10 times in a year.

      More important are the won units, that's for sure. It can help, when you have a good yield, but in the end it's the combination between volume, stakes (liquidity, money ressources) and yield. I am working on a setup, which suits my personality best. It's important to be always realistic. Liquidity and volume (amount of trardes per month) are issues, which you can't negate at sports trading. At the stock exchange you have other opportunities, that's for sure. On the other side, the margin is probably lower, 7-8% per year.

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