Strategies for Fixed Odds Trading

Fixed Odds betting on the financial markets, allows you to trade on a variety of markets, with the benefit of knowing how much you could win or lose from the outset. It’s called fixed odds betting because your returns are fixed from the point that you place the trade. Like betting on sports, you make a prediction on a future event, and are offered odds based on the fixed odds firm’s estimate of how likely it is to happen.

Odds are expressed in an amount of cash your bet will cost to buy in relation to the amount you want to win. If you are at ease with odds then they are also expressed in fractional (2/1 etc) and decimal odds too (3.00 etc).

There are a whole range of things that you can bet on, like if the Lloyds TSB share price will hit 90p in the next month share, or whether the British Pound/ Euro exchange rate will hit stay below parity for the whole of 2009. You can even make quick fixed odds trades based on what oil will do over 5 minutes.

With any fixed odds trade there are four important variables.

• The type of trade – There are many exotic bet types you can try but the bread and butter of most traders will be:
1. A “no touch” trade. This means you’re expecting the market NOT to hit a certain level (E.g. FTSE NOT touching 7000),
2. A “one touch”. This means you’re expecting the market to hit a certain level. (E.g. FTSE to touch 6800)
3. A Bull/ bear. This means you’re expecting the market to close higher (bull) or lower (bear) than a certain level. It doesn’t matter where it touches, it just matters where it closes. (E.g. FTSE to close above the level it started the year at)
• The critical level(s) – This refers to the exact level that you think the market will touch, avoid, or close higher than. Some bets can have two levels like a “barrier bet” which means you are predicting the market will stay between two set points.
• The time limit on the bet – This refers to the time you are going to give for the market to hit or avoid the level you predicted. Your trade might be over a few hours or over a few months. Remember a binary bet has to close at either 1 or 0, so there has to be a finite point that the bet will end.
• The odds being offered – This is final and in some ways the most important part of a fixed odds trade. If something is very likely to happen, the fixed odds firm will offer you odds as low as 1.03, which means you would be risking £10 to win 30p. If something is very unlikely to happen you could be offered odds of 11.00 (10/1) which means you would be risking £10 to win £100.

Key Principles

Many people don’t realise that the price being offered to you, is the most important part of making a success of fixed odds betting. We will offer you the odds of something happening, and you will work out what you think the true probability of something happening is. Your aim therefore is to seek out ‘value’ prices where your estimate of the probability of something happening, is better than ours. For example you might think that the FTSE has a 50/50 chance of hitting 5900 before the end of the year. 50/50 equates to odds of 2.00 or evens. If the fixed odds firm is offering you odds of 3.00 (2/1) then there is value in this trade.

The whole point of fixed odds trading is to gain an edge. If you think the market will collapse, there may be no edge if we also thinks this is very likely, and has set the odds accordingly. The aim therefore isn’t necessarily to guess the market direction correctly; it is to do it better than others.

Money Management

Money management is slightly different for fixed odds trading than it is with other forms of trading. With other forms of trading, much of the skill is in monitoring open trades, and knowing when to close them. While this is true to some extent for fixed odds trading, the onus is on getting it right up front, because you can just let the trade run to expire if you wanted to. This is one of the great advantages of fixed odds trading. It encourages you to do your research fully, and get your money management right, before you open the trade.

You often hear of amateur investors losing their shirt with shares, but fixed odds betting can be just as deadly in the wrong hands. Please consider all the risks involved at regular intervals, so that you are sure you can both afford the risks, and sleep comfortably with them too.

Give serious thought to the amount of money you apply to your account, and it goes without saying you should not use any money you can’t afford to lose.

If short term trading the financial markets using a leverage product such as spread betting, you are highly advised to risk no more than 1% of your initial starting account, on any one trade. With fixed odds trades you can potentially be more flexible. With a fixed odds trade you know exactly how much you stand to win or lose from the start, so there won’t be any nasty shocks even if the market completely collapses, all you will lose is your stake.

Therefore you could risk slightly more depending on the odds being offered. If an event is highly likely to happen by your estimate, then you are less likely to lose, so you could risk more. If an event is unlikely according to your estimates (but more likely than the odds imply) you are more likely to lose, so you might risk less.

With experience you’ll learn about your appetite for risk, your ability to handle the emotions and ultimately your ability to trade fixed odds. Start small using real money, use around 1% per trade then build up slowly.

Draw down.

‘Draw down’ is how much you are losing of your initial capital at any particular point. Many successful systems have periods of draw down, mostly during the first phases of a system’s life. For example, if you have a system that works 8 times out of 10 on average, the law of averages might conspire to make those losing trades your first trades. If you were risking 10% on each trade and losing all of it, then your draw down after two trades could be 19%. That’s not necessarily terrible if you are confident in your system, but if you allow it to continue, it could prove very costly.

The upshot of this is that you must start small. Entrepreneurs talk of the need to fail cheaply. What this means is that your failures will teach you more than your successes, but just make sure that when you do fail, it doesn’t cost your livelihood. You will make mistakes as you start out, but mistakes are not terrible and you will learn from them. Get rich slowly. Start small, make cheap mistakes, and build up slowly.

Key technical set ups for fixed odds trading

1. Understanding Trends

Understanding whether a market is likely to continue its trend, reverse or stagnate is vital for fixed odds trading. There are many ways of examining the strength of the trend. There’s no need to get overly complex about this, sometimes a simple eye balling of a chart will tell you all you need. Here are a few useful additions:

• Moving Average – The 50 and 20 Exponential moving average can tell you a lot in our opinion.
• Strength of pullbacks – If pull backs are weak and recoveries strong, the market is telling you it wants to go up. No trend can go on forever, and there will come a time when those ‘pauses’ become ‘corrections’ so keep an eye on the strength and depth of pullbacks against the trend.
• Across markets – Keep your eye on different indices. The Dow might tell you something the S&P isn’t.
• Multiple Time frames – View the trend from a broader perspective. A weekly/ monthly chart can show you just how strong or weak this trend really is.

2. Understanding Volatility.

With fixed odds trading, you can make money in trending and non trending markets, as long as you anticipate the levels that will or won’t be touched. Understanding the trend only goes so far, because it doesn’t tell us how soon you are likely to reach your destination point. When markets are volatile they will move quicker in one direction for a short period, when volatility is low, you may get little movement or very slow movement. Markets tend to cycle continuously through bursts of intense activity, followed by periods of relative calm. Understanding volatility can help us determine our time frames; it helps us predict possible break out points but not the direction. Useful ways of tracking volatility:

• Narrow Range Bars (NR7): The day’s “range” refers to the difference between the day’s high, and the day’s low. Identifying the day with the narrowest range of the last 7 days can give you clues as to when the market is likely to experience an upswing in volatility. Be wary of placing “No Touch” trades on these days, as significant movement may follow. Conversely they can be good days to place “One Touch” trades.
• Bollinger Bands: Bollinger Bands can be a useful predictor of impending market movement. When they are tightening, look for a break out, when they are expanding look for consolidation.
• VIX: The VIX is a measure of implied volatility in the options market. Extreme readings of the VIX can represent fear or complacency depending on the market cycle. When the VIX is high, the markets tend to act erratically. You can get charts of the VIX here: http://uk.finance.yahoo.com/q?s=^VIX&m=US&d

Applying technical set ups to fixed odds trading

The variety of fixed odds bets available, are best applied in certain situations, based on the trend and volatility. I’ve taken the most common bet types below and expanded on their best technical set-ups. I don’t mention any broad fundamental based inputs here for simplicity’s sake, but you should be aware of big up coming announcements like interest rates and payroll numbers in the US. Volatility is a big factor in the success you’ll achieve with fixed odds trading. For example, when the markets are swinging wildly as they did in September, then it might be better to avoid trade types that benefit from low volatility, like ‘no touch’ bets.

One Touch bets – You believe the market will touch a given level, at least once, before the end of the contract. The market only has to touch the level you have chosen as a one touch to win, which could be just moments after the bet is placed, days after, or at the last moment of the last day of the bet.

Time is against you with ‘one touch’ bets, because every day that the markets move away from the ‘one touch’ target, the odds are moving firmly against you. You need to pick the situations where the market will not only move, but will move pretty quickly.

Remember just because you are in a high volatility environment, it doesn’t mean that it will continue, so be wary of placing a one touch trade assuming that the market will continue to move rapidly. Chart formations might suggest a significant trend and all the facts might lead you to assume that it can continue, but markets are very unpredictable, and can quickly disappoint. The best time for ‘one-touch’ bets is the calm before the storm. If you know there is a big announcement coming up, like a crucial interest statement, or Non-farm payrolls in the US, the chances are the market will be coiling up ready to spring when the announcement comes. Just before big announcements many traders are nervous about taking big positions, which might make it seem like a low volatility environment, when in fact it is about to get very busy.

In the following example, an “up or down” trade was placed just before the US interest rate announcement in September 2007. An up or down trade is two “one touch” trades in one, you’re predicting that the market will touch either one of two points in the future. You just need the market to move in either direction significantly for you to win. If it bumbles around and doesn’t go anywhere you would lose.

Leading up to the recent interest rate cut, the market was very cagey, as nobody wanted to take on any big positions before the highly important US interest rate announcement. If they cut rates the market was going to shoot upwards, if they left them on hold or didn’t cut them enough, the market was going to drop. However there was no way of knowing which way the decision would go, but what seemed highly likely, was that the stock market would move significantly in either direction on the news.

On the day before the announcement (the 17th), the S&P500 was around 1480. An up or down trade with the triggers set as 1510 and 1480, could have been placed with the expiry 9 days later. As it turns out the US surprised many by cutting by half a percent. The upper one touch level was hit within a day. In hindsight perhaps these levels could have been stretched out further for an even bigger gain, it’s always easy to be wiser in hindsight.

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