Saturday, Aug. 9, 2014

Why Does A Trade Go Against Me

Betting Exchange ArticlesOne of the most frequent questions I get from clients is the one which says something like Why is that everytime I put a trade on it immediately goes against me?  Please help!!

Sound familiar? Been there, done that, bought the T-shirt? If the answer is yes then you need to step back and ask yourself why it is that this happens. There has to be a reason for this and the good news is that there is and that with some education and practice you can get the issue sorted.

One of the most useful books I have ever read, one which has helped me with my trading is one that most traders will never have heard of. No its not some secret code about how the market works written in Sanskrit its a book entitled Popular Delusions and the Madness of Crowds.

This book was originally written in the 19th century and has recently been republished. The book looks at herd the mentality and provides graphic evidence of the same by considering such historic events as the South Sea Bubble, and Tulip Mania amongst others.

The overriding concept of the book is that during these manias people tend to lose all sense of reality and their emotions become so carried away that they consider nothing else other than the fact they must get a piece of the action.

Consider the last top of the property market in the UK or anywhere else for that matter.  A heads-up for the crash was signalled by a buying frenzy of people caught in a whirlwind of expectation which encouraged them to pay prices way above true value.

Consider any other run up in prices to historic levels in any commodity you like to mention and the story is always the same. I will list just a few. Stock Market Crash 1930, Stock market Crash 1987, Stock Market Crash 2001-2002, Housing Crash 1990-1991. High in Dollar V Euro, Highs is Silver, Highs in Gold, etc etc. the story is always the same a buying frenzy the like of which you have never seen before which drive prices to amazing heights and which sucks in every last buyer before the price goes crashing heavily back down again.

Did you know that in the Netherlands during the 17th century Tulips were such revered and admired plants that there developed what is now known as Tulip mania? Tulips had recently arrived in the Netherlands from Turkey and they were absolutely the thing to have, a sort of later day version of the ipod. If you were someone in the Netherlands in the 17th century you needed a tulip or two and guess what happened. Tulip mania developed. The situation became so extreme that people exchanged houses for tulip bulbs, so one tulip bulb became worth one house!! Can you imagine the hysteria there must have been around for the price of a bulb to have been driven up so high that it become equal to the price of a house??  Its always the same story.

Read the book as it covers the Tulip mania crisis and many more similar events. You can buy it on Amazon, better still get it from your local library, save the price of the book, put that in your Betfair account use some of my strategies and even the examples I have shown in this article and improve your own situation.

Now to come back to the original question, we need to look at what is happening in the market, your chosen market, be it horse racing tennis, cricket, or financial markets when the trade always goes against you and see how this relates to the manias I have described above. How to do this?

Again we come back to human emotion. The markets are driven by fear and greed. If you follow my blogs you will know that I often mention this fact. At the tops of these markets be it Silver, Gold, Housing or whatever human emotion is being shown in mass proportion it is quite simply greed. Everyone has to have a piece of the action they cant possibly miss out and so they pile into the market.

There is an old adage that if you step into a taxi in New York and your taxi driver starts telling you about how many shares he has in some company like Microsoft then you are at the top of the market and its time to come out. When Joe Public is so convinced that everything is rosy and prices can only go higher, you are very near the point when all players are committed and prices will reverse. This is when the pros are already stepping in.

If we look at how those price rises develop, again the story is always the same. It is a gradual process whereby buyers join a rising market. Inexperienced traders like to trade with the trend which is fair enough, but they need allot of confirmation that the trend exists before they are prepared to join in. The most inexperienced and greedy traders the ones who are liable to suffer the most from fear and greed will be the ones who wait the longest for that confirmation and will also be the ones who trade the most aggressively and as they go in at the top of the market. They wait for so much confirmation that the move is in fact completely over. This is what is happening when you get the issue on betfair when you enter your trade and it immediately goes against you.

What is happening is that the trader is following price movement or reacting to price rather than pre-empting it and herein is the key to the problem.

The way it works is that you get small ebbs and flows in the market the whole time, little mini manias all day long. These are only minor manias within a  larger overall picture of course, but the important point to note is that the same human emotions are played out over and over and over again. Just on a smaller scale.

How to see this action happening?

If you couple your analysis of the price action with an analysis of the volume which has been traded you will be able to see peaks and troughs in the market. These are defined by excessive volume and exhaustion in the price action itself. This demonstrates the final surge of demand read greed - and will give you a good heads up that the market has made a high. As I said there are mini peaks within peaks and peaks within larger mountains, but the trader reactions are always the same and based upon the human emotions of fear and greed.

Remember that the same concept I have described works for price movement to the downside as well as the upside.

But how to trade these peaks and take advantage of them. The first thing to say is that for most people taking a reversal trade off  an exhaustive upside move in price would appear to be easier than taking a reversal trade off a downside move. Our minds seem to be programmed in such a way to accept the concept more easily. There are phrases such as what goes up must come down which tend to reinforce our willingness to step in and take such a trade. We also have the concept of gravity as well.

Conversely, reversing off a downside market is much harder for people, there is also the expression about catching a falling knife even the idea of it puts people off. Stepping up to buy a market which has fallen sharply is not easy.

Now when a market makes an exhaustive move to the upside there are three things that can happen. The two most likely are that the market either goes sideways or it starts to reverse and fall. So the way to play the trade is to enter against the direction of the prevailing trend, but do so only when an exhaustive move has happened. The first thing to say is that please only attempt to do this when you have established what it is on your chosen market that constitutes exhaustion in the price action and volume. You can do this by looking at charts of your market. Work it out and do your homework.

By entering like this you will be pre-empting a price movement rather than following or chasing price movement and therefore you will avoid the issue of the market turning immediately against. When the market you will be in the beginning of the move

The third thing that can happen when you enter a reversal trade is that the price can still continue going on to the upside. If this happens you should simply understand that the price has not truly exhausted itself and you should exit from your position.

If we assume that price at least stabilized when you entered your position, the next thing you need to monitor is the length of time it stays at its current price level. I will give an example, let us assume you want to back a particular horse, and the price has been drifting in the market from 2.0 to 2.8. Looking at the price and volume action you decide that both look exhausted and you back at 2.8. If the price shortens a little say to 2.7 and then moves back to 2.8 and begins a sequence of oscillation between say 2.62 and 2.8 but never really sells off hard,  then price is being accepted at the new price area of 2.8. The  likelihood is that price will continue up to 2.9 and above, therefore you should consider either reducing your position or exiting your position or at the very least putting a tight stop in a 3.0

In the majority of cases once the price and volume exhaustion have taken place and you enter the market, price will retrace and your trade will very quickly become profitable. In fact in the majority of cases his will be so quick your Betfair trading will enter a new era. Forgotten will be the old days when you entered a trade and the market moved directly against you.

If you would like to talk trading then drop me a line.

This article has been published with permission. You can contact the author by emailing [email protected] if you need any help or have any questions regarding the articles.