As way of introduction, I began trading on Football Index in October last year. I thought I had a pretty good knowledge of football and I had been learning to trade Forex for the last 7 months, so this seemed to fit perfectly.
When I started I thought I was going to pick it up very fast, because after all, I know football right? And I know what buying and selling means in regards to a trade, yeah? Well, it’s easy to buy and sell futures in players, but then it dawns on you that you have to learn when to buy and sell.
Now this is something that no-one can master perfectly. If you could sell every player at their high and buy at their low, you’d be extremely rich very quickly. But there is one particular pitfall that I think almost all traders, including me, fall into in their early days on Football Index.
The average buy price
When looking at your portfolio, you’ll see the ‘cost’ column, which shows your average buy price per share for that particular player. If you buy 100 futures in Mohamed Salah at £8, it will show £8. If you buy another 100 when he hits £9, your average will change to £8.50.
Now, the moment of enlightenment that hits all traders one day is that this average buy price of a player is completely irrelevant. Absolutely, and totally irrelevant in any decisions you should ever make regarding selling shares in that player in the future, or indeed buying more either.
But I don’t want to lose on a trade
Get used to it. I started with this attitude and quite honestly looking back, I’d call myself an idiot for it. I’d say these days I probably close over 90% of trades for a profit, but often the best decisions are closing the losing trades before you lose more, and reinvesting it in someone who will rise in price.
The only question you need to ask yourself with any player, at any time, is, ‘is this player likely to rise or fall from his current buy price’. If you think the chances are they’ll rise, buy more (unless you have the maximum you want of the player, for risk/diversification reasons possibly), if you think they’re more likely to fall, sell them, regardless of your average cost.
Here’s an example to try and illustrate the point.
Say I hold 100 Isco futures at an average cost price of £3, but you bought 100 on a huge price spike at £5, and since then he’s dropped to £4. He is currently worth £400 in both of our portfolios. Our respective decisions of whether we buy and sell, should be exactly the same regardless of the fact I’m £1/share up, and you’re £1/share down.
If Isco breaks his leg during the first game of the season and we’re watching the game together, we should probably both instant sell immediately, before anyone else does if we can (if you miss the drop, it could be better to hold for the bounce back). However, if he plays in the number 10 role, scores a sensational hat-trick and scores 350 on performance buzz (PB), we should probably both buy a load more. It’s as simple as that, what we originally paid for him a while ago makes absolutely no difference to what we should do.
If you hang onto him at £4 when he breaks his leg because you’re at a loss, you’ll find yourself at a bigger loss when all the experienced traders have hit the instant sell button and he’s now down to £3 again. You’re now £200 down instead of £100.
Didn’t you just ruin your average buy price when you bought 100 more futures?
This is the exactly the same mistake as not selling someone at a loss when you know they’re going to fall. So in the above scenario I had 100 Isco futures at £3 each, then I bought another 100 at £4 as he knocks in his hat-trick goal. So now I own 200 at an average price of £3.50.
As I was quick on the rise, he shoots up to £4.50 a share, meaning I’m still £1 a future up, but I now have 200 futures. My portfolio will now show current profit on Isco is 200 x £1 = £200. If I hadn’t bought any more for fear of ‘ruining’ my average buy price, I’d be £1.50 a share up but only have 100 shares still, so just £150 up.
Buying shares to reduce average cost
I fell into this trap in my first couple of months of trading, and again it’s about being worried by the average cost. Say you have 100 shares in someone and you’re 10p a share down, so you’re £10 down. You buy another 100 at the lower price so you’re now only 5p a future down, however you now have 200 futures, so you’re still £10 down. If that player continues to fall, you’re going to lose a lot more money now you have 200 shares.
Just to be clear, this isn’t always a bad idea, but understand why they’re falling. Is it an overreaction? Is it someone selling a load of futures to buy someone else, and actually a good opportunity to top up? Or are they falling because they’re injured, out of form or lost their place in the team, and hence are likely to fall further?
Playing devil’s advocate to the original point for a moment, I was at quite a significant loss on Lionel Messi halfway through last season and kept topping up a little more as he dropped because I strongly felt he was undervalued. I ended up making 28% on him in around 8 months when I sold up during the World Cup. The key here though is that he’s world class, and with the Champions League knockouts and World Cup to come, I felt that the drop was unwarranted and that he’d bounce back strongly.
Conclusion
I understand that ignoring the average cost/buy price can be hard for people to get their head around, as I’ve been through it too. But the sooner you buy and sell by taking into account how your players’ prices are going to move and ignore the average cost, the better trader you’ll become.
And by the way, my knowledge of footballers around Europe is now 100 times what it was when I started… do your research.
