Cutting losses and running profits
The human being is really interesting to observe, and human psychology is fascinating. Numerous books has been written, and for the interested person there is enough to read to fill a lifetime. For anyone who wants to work with trading Betfair or other betting exchanges it’s crucial to learn as much as possible about the human mind. Not only to understand the people beihind the market, but also - and this is maybe more important - to understand themselves.
Think about this: Someone offers you £25 and gives you the option to flip a coin - heads and you get £50, tails and you get nothing. You would probably choose to take the easy £25, right? Don’t worry, the majority of all people would make the exactly same choice.
Now pretend you owe someone £25. The person gives you the option to flip a coin - heads your debt grows to £50, tails and your debt is gone. In this scenario, you would probably choose to flip the coin.
There is no difference in value between theese two examples. In the long run heads and tails will show up the same amount of times, in both examples. There is no benefit in choosing one option over the other in the long run, but most people choose to take a chance of getting rid of a debt over being able to maximize a profit.
But how can we use this knowledge in our trading? Is it coin tossing we’re doing?
Of course not. But the traders on the betting exchanges works exactly as all other humans. And unfortunately we many times can see this behaviour in ourselves. We tend to be ready to let losses run, as we live on “the hope” - after all, the market can turn! At the same time we want to realise profits as soon as possible. This means that we let losses run, and that we cut profits - not so smart, huh?
This is a product of our unwillingness to admit being wrong. Pride is one of the traders most dangerous enemies, together with hope and greed. If you want to be a succesful trader you have to act the absolute opposite way.
The recipe to become a successful trader at Betfair and other betting exchanges is as easy as effective - sell your losing positions and let your winning positions run!
Filed under: Educational, Trading
[…] number. You will even leave days, weeks and months with red numbers sometimes! Of course you should cut your losses as soon as possible, but even the best trader some times hangs on to loosing positions ending up in […]