Hedging for Profit (part 1)

When we hedge we are looking to guarantee a profit no matter what the outcome of the event, this is achieved by locking in our back bet with greater odds than our lay bet and adjusting the staking on the back and lay bets of our selection. In the second part of this article we will concentrate on the mechanics of the bet and setting up Bet-IE to fire our bets into the market. However for this article let's look at why a hedge is such a profitable bet to use and an idea of how you can increase your potential strike rate by a little interpretation of the racing style of your selection.

We all know that In Play markets are a lot more volatile than pre race markets and that scares a lot of newcomers so hedging is a technique they never try because of the perceived risk. One thought that I would like to point out to you is actually the more volatile the odds the better as far this technique is concerned. The more the odds bounce around the better our chance of getting matched.

What causes a horses odds In Play to move? Well there are a number of factors that can be given. There can be bookmakers offsetting liabilities, there can be traders offsetting liabilities. However one major factor to consider is the horses positioning during the race, also the apparent visual ease (or not) of the jockeys riding style onboard the runner. I do want to make something clear at this point, when starting to hedge DON'T USE SPRINT RACES for your hedging bets. The reason is simply the sprints tend to be run in a bunch and flat out so the finish of the race can be rather close and the odds tend to remain stagnant until the final couple of strides by which time its very late to get out of trouble. So concentrate to start with on races of 1 Mile+ in distance, no 5f, 6f and 7f races. We can adapt another strategy in these sprints (see Lay All strategy)

Now let me explain our bookmaker scenario for you a little better, our bookmaker may have taken a lot of money on one runner before the start of the race, in the past they would try and offset the liability with another bookmaker and then he offsets with another and so on, before you know it the price is crashing of the runner before the start of the race. Invariably the end result is a bookmaker laying off his liability with one of the big three bookmakers and its normally they who are responsible for the rapid shortening of the odds late in the market. This could be because of multiple bets that are accumulating up and they want to reduce the payout if the worst case scenario happens, or it could be a good old fashioned gamble.

As the betting exchanges came into existence it wasn't only the punters who where rubbing their hands, the bookmakers now had a place to easily offset their liabilities In Play!

So our bookmakers motivation In Play is to get the money into the market early to get their liability reduced, remember they already know what odds they have layed and so they simply place a back request into the market for slightly larger back odds and they can guarantee a profit even from a bad starting position.

As an investor we can learn a lot from the way our bookmaker friends operate, they make relatively small but consistent profits and where available they will lock in a guaranteed profit. Hedging can be used in exactly the same way on the betting exchanges by everyday investors not just the bookmakers, we can lock in a position as the race starts and then place an order into the market to lock in a guaranteed profit should our ordered odds be matched. In case our odds are not matched we can fire in a stop loss.

A stop loss is designed to limit a liability we face in a market that moves against us, unfortunately this will happen from time to time and it's important that you know what defensive measures to take. When I hedge I tend to use a fixed profit target although this stop loss method will work just as well if you rely on the spread percentage to make your profit you just need to take note of what your profit target is.

Let's say I want to make a £25 profit from my hedging bets, approximately 90% of the time my bets will be matched and profit made but that means that 10% of the time they won't! Now if I have a full liability facing me I may be eligible for a few hundred pounds loss in one go, not a good position by anyone's imagination! So I look to use a stop loss to reduce my potential liability, if I face a position where the odds move against me in the market I look to get a stop loss in place that limits my liability to 3x my profit target so in the case of this example I would look to close the position at a £75 stop loss..

This is done deliberately and let me highlight why, my hedge would be successful approximately 90% of the time so that means out of a 100 bet cycle I would expect 90 bets to make a profit of £25.

90 x £25 = £2250 profit less 5% commission = £2137.50

Now 10% of the time I will take a stop loss and this limits my loss to £75.

10 x £75 = £750 liability including 5% commission = £787.50

Overall if this pattern continued you can see I would profit approximately £1350 per 100 bet cycle, as you can see I am consistently making a value bet, I have an edge in my favour and I know that I will make a profit following these guidelines. Again when we are looking at what makes this method profitable long term we need to make sure we have the VALUE in our favour and not against us.

Now if I don't make a 90% strike rate and my races only make me an 80% strike rate does that make a loss? Or simply reduce the profit?

80 x £25 = £2000 profit less 5% commission = £1900

20 x £75 = £1500 liability including 5% commission = £1575

So again overall you can see by balancing the strike rate and stop loss figures how you can still make a profit on your 100 bet cycle this time per 100 bets my profit would be £325.

If you have a 77% strike rate with a £25 profit target and a £75 stop loss factored after commission we have our virtual break even figure.

77 x £25 = £1925 profit less 5% commission = £1828.75

25 x £75 = £1875 liability including 5% commission = £1811.25

Now how do we make this profit? Well it is a well known fact that nearly 90% of all runners will drift at least 10% in play at some point during the race to their starting price. So if we look to identify a horse who is not likely to be worrying our bookmakers liability (not a 'steamer' before the race) and is not a sole front runner that will be allowed an easy lead (these tend to shorten from the start of the race until/if a winning run ends) we have a basis to examine a hedge from.

So where do we look for this information and how do we identify a runner to concentrate on? Now there is an easy way and a more complex way of creating our hedge. We will examine in the next article a simple strategy for building profit from a market based approach, here we will look at a little more indepth way of creating our hedge.

We start by looking at the Racing Post web site (you need to register but it's free), go to the Cards area and then check the form of every runner by clicking on the runners names. This is a simple check, we are looking only for the running style of the horses in the race so whether they race prominently throughout or are held up in the middle of the group of runners or held up at the rear of the runners for a late effort.

Why do we need to look at all the runners? well the shape of the race is important as I have said if your selection is the only perceived front runner and its allowed an easy lead then it will be hard to pass, this would mean my hedge would be more likely to be matched if I back then lay as the race starts. Remember to start with we are looking only for small % spreads between the back and lay variables its the direction the odds will travel that's important.

So what if I have selected a hold up runner and there are a lot of front runners? well this could point to winner coming from behind and swooping late to take the prize however in the early part of the race this type of runner can actually drift a little before its run starts so a lay then back bet for a small spread could pay dividends.

It can pay to just hold back the entry of the hedge and check the race is playing out as you expected i.e. the runners at the front are the runners you expected to be there. If they are not then you can hold your hedge back and even not place the bet, remember we have that choice nobody is forcing us to make a bet in every race we should only place a bet when we consider we have the strongest winning chance.

Another key consideration to make is whether the horse acts on the going, probably the most important form based variable you can use. Also couple up with the going; has the horse run over the distance before? If it has how did it perform? Do you think that the distance is correct for the runner or does it need further or shorter in your opinion? All these simple form checks can give you a 'feel' for the race and this can help you get out of a position you feel uncomfortable with earlier. This has the benefit of PROTECTING YOUR BETTING BANK and this has to be your main priority.

Now you may say that's way above my head, I'm only a newcomer to the software and racing! Then you will be pleased to know there is a simple strategy you can employ to make your profit grow steadily based on purely the market odds and we will look at this in the next article.

Until next time, stay lucky!

Dave and Nessie