Finding Your Edge

Knowing that your spread betting system or spread betting strategy actually has an edge (or positive expectancy) is the number-one requirement for profitable spread betting. If you can’t write down your trading system’s expectancy value then you don’t know it. If you don’t know it you are doomed to failure. Nothing will compensate you for the lack of an edge.

What is an edge?

Your edge is simply your advantage in the game. A great place to demonstrate trading with an edge is the casino. The game of roulette offers many types of bets: individual numbers, corners, odds/evens, red/black etc. All these bet types have something in common: if you play them for long enough you will end up going broke. The reason why you will go broke eventually, irrespective of the staking plan you use, and the reason why casinos are literally licensed to print money, is because the odds offered on their games are not fair. That is to say, the odds they are giving you do not reflect the true chance of the outcome you are betting on. The difference between fair value and the worsened odds offered by the casino is their advantage, their edge.

The red or black bet looks fair enough at first sight: double your stake if you win, or lose your stake if you don’t. There are 18 red and 18 black segments on a roulette wheel, a straight 50/50 proposition? Unfortunately not – it would be true if it were not for the presence of the zeros on the wheel. If the ball lands in a green segment (one of the zeros) the house will take the money off both red and black as losing bets. Most wheels typically have two zeros. This amounts to roughly a 5% advantage in the game for the casino. A few “lucky” individual players will leave with a profit if they happen to hit a favourable sequence and have the discipline to stop when ahead. Most will lose more than just the casino’s edge, due to something known as the law of large numbers: casinos have unlimited funds, while the player is forced out of the game after a capital-exhausting losing run. We will see in a later article how spread betting firms use the same law to their advantage by taking on the small spread betting account holder.

All games of chance in the casino offer unfair odds and are unbeatable in the long run, all except one: blackjack. Blackjack offers those players with the required skill and discipline the opportunity to profit through card counting (although casinos generally remove the opportunity). By memorising the cards dealt, card counters aim to spot times when the picture cards are likely to be greatest. High numbers are bad for the house, as the house has to draw another card if they hold 17 or less. A greater density of high cards increases their risk of busting. By keeping stakes small through normal play, while increasing stakes when a run of high cards is expected, the player can alter the balance of play to their favour, and turn a 5% disadvantage into a 5% advantage.

Spread betting is a very similar process. By waiting to trade only those times when the proposition presents an edge, the bettor has an edge. The edge is known as expectancy. Casinos have a positive expectancy and expect to win 5% of the total wagered in their house. As a trader, your spread betting activity must also have a positive expectancy, an edge.

Know your edge

Your expectancy is not the same as your win rate. Many novice spread bettors believe their win to loss ratio, or their strike rate, determines their profitability. Unfortunately, it is not that simple. In the example of the blackjack player, we saw how his strategy required him to bet less when the odds were against him and more when the odds were in his favour. At the end of an evening he may have had more losing bets than wining bets, but have an overall profit because of the increased bet size during the times of his greatest advantage.

Some games flatter to deceive, as they offer a high win rate but no positive expectancy. For example, laying high-priced horses on an exchange looks potentially profitable, because you are likely to hit frequent profitable runs. Laying horses at 10–1 will reward you with £1 from the backer each time the horse loses. As 10–1 shots don’t win very often, you may find you have collected £1 many times in succession. Eight wins without a loss looks a good system; however, when the loss does arrive you will pay out £10, putting you into negative territory. Because horse betting markets have a cost of play and an “over round” book, as a player you have a negative expectancy.

With a positive expectancy you will win money spread betting; with a negative expectancy you will lose money. It is not enough to see an increase in the running bank total over a small sample, as in the case of the high-odds layer. A favourable sequence will produce an increase of capital even without an edge, but is not sustainable and will eventually turn to a loss.

It is easy to understand why many traders who actually make money spread betting follow a mechanical trading system based on simulations performed on past data. Analysing the past performance of a system reveals its expectancy. The expectancy is the magic number, revealing if the system tested really does have an edge.

The simple rule: if you don’t know your expectancy, expect to lose!
This is only a summary of this topic, covered on the free trading seminar, where you will learn how to calculate your edge and see the proven systems that you can now employ to give you that important edge.

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