Trading tutorial

What is trading?
Trading is essentially betting on the movement of a selection's price. If you think that a selection's price will fall, you would back it now and lay it later at the lower price. As long as the price moves in the direction that you have anticipated, you will be able to lock in an immediate profit. This trading process can be repeated several times within one event.

Trading on the betting exchanges is therefore no different to trading on the financial markets. If you believe that a share price is going to fall, whether for fundamental or technical reasons, you would short (sell) the shares and then buy them buy them back at the lower price in order to cash in a guaranteed profit. The sequence of your bets (back first lay later, or lay first back later) is therefore determined by your view on the likely movement of your selection's price. This view may be informed by your opinion of what will happen next within the sporting event or by your analysis of the dynamics of the selection's price.

You can either wait until the price moves before closing out for a profit, or you can submit an order at an exit price of your choice and wait until it is matched. You can adjust both the price and the stake of your submitted order at any time.

If you are trading on the same exchange, as is usually the case, you do not have to provide funds to cover your closing bet. This is because the exchange automatically treats the potential winnings from your first bet as the stake for your closing bet.

Betting exchange traders also benefit from a reduced commission liability, as commission is payable on your net market profit, as opposed to the (larger) profit from the winning selection.

Specifying your trading sequence
If you are trading on a price rise, you should select the Lay Selection 1 stake constraint, as you will be laying first and backing later.

If you are trading on a price fall, you should select the Back Selection 1 stake constraint, as you will be backing first and then laying off later.

Commission settings for trading
If you are placing both bets on the same exchange, which is the most common and lucrative form of trading, ensure that the Back and lay on same exchange commission option is selected. This lets Arb Cruncher know that commission is only to be deducted from your net market profits, and that you do not need to provide money up front for the closing bet of the trade.

This is the default setting of the Back/Lay calculator, so all you have to do is open Back/Lay and enter your betting exchange commission rate in the bottom commission box.

Trading example
You have already backed a horse called Hotshot on Betfair at 4.00 for 200.00 in anticipation of a price fall. The Lay price of the horse subsequently shortens on the exchange to 2.50, and you want to know how much you should lay it for at that price. The example assumes that your Betfair commission rate is 4%.

Open the Multilay calculator.
Enter the bet details (both prices, the original stake of the Back bet, and the 5% Betfair commission) in the white boxes, and click the Calculate button.
Arb Cruncher instructs you to lay the horse for 320.00 at the new Lay price of 2.50. This stakes locks in a trading profit of 114.00. See the breakdown of this profit figure below.
Back Hotshot
Lay Hotshot
Trading Profit
Hotshot wins
+ 600.00
- 480.00
Hotshot loses
- 200.00
+ 320.00

So, let's have a closer look at this profit figure of 114.00.

If Hotshot were to win, you would win 600 (200 x 3.00) from the Back bet, but lose 480.00 (320 x 1.50) from the Lay bet, as you have to pay out as a layer. This gives you a net market profit of 120, from which Betfair will deduct commission of 5%. That leaves you with 114 (120.00 - (0.05 x 120.00)).

If Hotshot were to lose, the calculation is even easier. You lose 200 from your Back bet, but win 320 from the Lay bet. Again, this gives a net market profit of 120 from which Betfair deducts the same 5% commission to give 114 as your trading profit.

Trading example screenshot
This is a screenshot of the above example. Note that the Lay Bet Liability is zero because Betfair realises that your winnings from your Back bet would cover the losses from the Lay bet, so do not require any additional deposit from you. So, as your Total Stake is 200, the Yield (return) on your trade is 57% ((114 / 200) x 100).

What is the Lay Bet Liability?
The Lay Bet Liability is the amount that you would lose if the selection that you are laying wins. It therefore corresponds to your stake (exposure) as a layer, and should not be confused with the backer's stake that you are laying. Betting exchanges require you to deposit enough funds to cover the liability of any lay bet that you make. It is obtained by the following formula:

  Lay Bet Liability = Backer's Stake x (Price - 1)

For example, if you layed a horse for 100 at 6.00, your Lay Bet Liability would be 500. This is the amount that you would have to pay the backer if the horse wins. If the horse does not win, you would win the backer's stake 100 minus commission.

Arb Cruncher displays your Lay Bet Liability for all Back/Lay arbs and trades. The Total Stake displayed by Arb Cruncher is computed by adding the Back Bet Stake to the Lay Bet Liability.

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Fairlay - Bitcoin Prediction Market and Exchange

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