I remember seeing an interview on TV with some guy who’d made millions from spread betting. Not doing it – selling it. And he came out with what I later determined to be a stupid thing to say: “trading is easy, it’s just 50:50. Things either go up or they go down”. What a crock!
If his spread betting platform were free to use, in other words no spread, then that would be closer to being true but even then it would still be way off.
So what is the true picture then?
Firstly, there is the cost of trading. Whether it’s the bid-offer spread and dealing charges, or a spread incorporating charges, like a spread bet or CFD, then straight away you’re not on a 50:50 bet. Unless you make the spread back you’re going to lose. That’s hard to put into percentage terms, and it would depend on which instrument and which product was involved. But let’s take a spread betting example. If you take a binary bet where it starts with a mid-price of 50 and then finishes either at 0 or 100 then the spread at the outset is typically 4 points in my experience. So we can say that straight out of the stall the chances of winning are 52:48 against. Not significant odds I’ll grant you, but what else is there getting in the way of the 50:50 fallacy?
The probability that you are right! This will depend, as all trading does, on a host of variables. But let’s say we have a trading strategy with a 75% chance of success. Ok then our 52:48 bet, or in simpler terms our 48% chance has now reduced to 36%. And a 75% chance of a trade working is actually very attractive indeed, and still we’re down to 36%.
Then you have to consider practical problems in trading: slippage, incomplete fills, latency, etc. Let’s say those only affect you 1% or 2% of the time then. Depending how you factor that in, you’re down to around 35%. The plain fact is that at best, ceteris paribus, you are staring down a one in three chance of winning in round figures, given the favourable scenario I’ve painted above.
The most important factor in trading is to start with a probability of success that is in excess of 60%, I’d say. You could argue that anything over 50% will make you money, well back to the example of spreads and costs, which can well screw that idea up. But even if it doesn’t, you’ll have to do so many trades that it will be impossible to make any significant amounts of money unless you either have a very great deal of money, or you have access to the sort of high speed trading systems that banks have – and I’m guessing you don’t.
So, no, trading is not a 50:50 game. It’s a 2 to 1 game at best, and that’s why the man who said that made millions off of people spread betting!
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