The Road to Trading Riches - Compound Interest
Thanks to Paul Green for bringing up today's topic, he asked a question about compound interest and I realised this topic is well worth a blog post.
If you have not read my bankroll management blog post then I seriously advise you to! https://betfairtradingcommunity.com/en/blog/bankroll-and-bet-staking
But anyway on to today's follow up:
A few of you may be wondering what 'compound interest' actually is! Quite simply it is increasing your stakes as your bankroll builds accordingly, the general premise being that if you are making a profit and increasing the stakes this way over time you can make serious gains in the long term.
If I started off my trading with £100 bankroll and used 2-5% (£2-5) per bet as a stake if I was compounding the interest when my bankroll increased I would up my stakes. So if I made £10 and now had £110 as a bank I may start using £2.20-5.50 stakes as that is a 10% increase which is what I have made so far, in effect I am not taking any more risk by doing this and it means I can move up the levels more quickly. Once I reach £200 profit I would now be using £4-10 per bet which is double my initial stakes. Should I reach £400 I would use £8-20 stakes, which is qualruple my initial outlays. As you can imagine if this continues it will not be long before I have a £10,000 bankroll and am using £200-500 stakes!
So what are the benefits of compounding interest?
- Can start with a smaller bankroll and build up quickly as you learn to profit
- As you move through the trading levels you are only doing so due to your talents, so less risky
- Once you reach a high level the money you are using is just profit already made, so no risk of losing serious cash
- If you decrease stakes also when it goes wrong you protect your bankroll
- It is how most Professional Traders start off
Seems great but why don't more people do it?
In the world we live in it is not always easy to be patient, we live in the Internet age where information and products are instantaneous, who wants to wait to be a Pro?! The problem is this is where most traders go wrong, they start with big bank rolls aquired by other sources and overstake until they lose their whole bankroll within a handful of bets.
Mentality is huge in this game and so is the ability to take a step back be patient and remember when it doesn't go right there is a new day tomorrow.
The other issue blocking people from compunding interest is the want or need to spend any trading profits, either on essentials like bills or on something frivelous like a fast car. The key is to try and have a side pot that you can use for a bankroll that you do not need to cash out from, until you reach a high level. Nothing wrong with starting with £100 and building slowly from there, learning the tricks of the trade as you go without making expensive mistakes.
Ok so how do I get started?
I have a very simple rule of thumb that has helped me well over the years and that is the 50% increase rule. If my bankroll increases 50% then I will increase my stakes 50%, if my bankroll decreases 50% I will decrease my stakes 50%. What you will quickly see is it as hard as hell to lose a bankroll when you apply this method! You would need to lose so many bets and trades in order for that to happen. Gone are the horror stories of yesteryear where you may have lost 70% of your bankroll in one day or even blown the bank.
You are welcome to increase stakes earlier or later than I do but the golden rule is to make sure the increase is inline with your bankroll. No matter how much your banroll increases DO NOT up your usual stake percentage! Keep it around the 2-5% mark for inplay trades or outright punts or 10% for prematch trades.
So unlimited wealth and bankroll growth opportunity awaits! Once you up your level significantly you may be slowed down a bit by market liquidity but if you have already made that much money your stakes will be enough to make a very comfortable living!