Bet Against the Crowd! Liquidity and Volatility on Betfair and the Stock Market - Part 2

Regardless of platform, all traders will be faced with a series of tough questions, mental debates and challenges on a daily basis.

Here are four important questions, one of which will be in any traders head at any given time.

1 If the price of a stock that I hold is still rising I would be foolish to sell when it could go up even further?

2 Should i wait till the stock starts to fall before selling? The price has been rising steadily, it won't crash overnight will it?

3 If the stock has just plummeted then something is wrong with this company and it is not worth buying?

4 The stock is soaring, I must buy now or I will lose out?

Although all these four statements appear to make sense, on closer analysis it can be seen that for basic fundamental reasons an experienced trader should know innately that all four statements are in fact incorrect, for one of the fundamental reasons outlined below.

1 When a stock is "oversold" we can say that supply exceeds demand and so the price will fall, conversely if demand exceeds supply the stock is "overbought" the price will rise. How do we as traders pinpoint the specific point where the demand/supply ratio is about to switch?

2 This is of course the eternal, essential question and the answer is we don't. It is impossible to predict the "exact" point at which a market switch event will occur, despite hundreds of attempts involving expensive computer programmes etc.

3 The volatility of your stock is intimately linked to news and events that in some way will affect your stock. Some of this news can of course at first glance seem completely unrelated to your particular stock i.e the global economy can affect the entire index for your stock and movements of the index then directly affect your given stock.

4 We have seen in the recent credit crunch how corrections in one particular sector - the banking sector can affect the entire market around the globe wiping billions of dollars off literally every index, from commodities to pharmaceuticals. The Market is NOT king. Confidence in the market IS king.

5 When a market "switch" event does occur it can often create a stampede amongst traders which can wipe out recent gains in a matter of minutes, this is the herd mentality and can leave stocks hugely undervalued after a selling spree.

Experienced traders know that following a market crash is in fact not a time to be negative, and in fact this is the prime time to buy certain stocks which have been "oversold" as they represent "value" buys.

But as always there are important caveats, if a stock has crashed because a company is being liquidated then it obviously does not represent value at any price.

If it is undervalued because the entire index has simply suffered a bout of selling or a crisis of confidence then we can be assured that at some point confidence will return and the stock will rise again.

However in times of crisis it can seem difficult to muster up the courage to start buying again, and this is where novice traders lose out.

So how do you as a day trader make use of this mass of information to trade on the stock market.

Well you do it because it is your job, but many day traders fail and many are indeed turning to the betting exchanges as an alternative where their skills can be put to better use.

In many ways the betting exchanges offer a more coherent overall view of the market and volatility. With fast internet and racing TV a race trader has ALL the means to assess relevant aspects of volatility In advance of the market. Its all about control.

Also as the stock only exists for less than one day, the trades are closed at the end of each race and a trader can go to sleep knowing that nothing untoward can happen to his equities overnight.

Day traders come to the betting exchanges with a solid background in Technical Analysis and Fundamentals, they will have experienced the pain of losing trades and will understand the relationship between volatility, liquidity and the market spread.

For day traders used to working the stock market, the betting exchanges offer fast turnover, quicker more agile trades.

Why bother with the slow torture of leaving medium/ long term trades open in the stock market when you can have made 5 or 6 trades in 15 minutes on one single horse race.

Lets look at the benefits of trading horses on Betfair:

* You choose which horse and which race to bet on
* You know the exact time of the race and therefore the time that the trade will close.
* Medium term trades can be opened early morning or the night before and closed during the afternoon of the race.
* Pure scalpers can use short term scalp, swing and momentum trades which can be opened and closed in the 15 minutes before a race as liquidity soars.
* Trades can even be placed during the actual event so taking advantage of extreme volatility. (not for the faint hearted and not for those without racing TV).
* At the end of each days racing a trader can examine the profit and loss account to see precisely the fruits of his days labour.
* You can forget about the global economy, forget about events out of your control, forget about the 8.30 am opening time on the markets and forget about boring economics and accounting.

The fundamentals which are part of your armoury are all online at:

* racingpost.co.uk
* attheraces.com
* sportinglife.com
* oddschecker.com

Technical Analysis platforms allow you to take your trading to the next level and they are a steal compared to the expensive financial packages that day traders will have been used to.

Bet Angel Professional is the flagship trading platform for Betfair, the real time Supercharting facility is recognised as second to none.

Ladder trading allows you whole market views of liquidity, and one click trading with offset allows you to fire trades into the market in microseconds stealing a big advantage over users stuck with the standard Betfair interface.

Simple chart setups using Quick Moving Average Back Price, Price Envelope's, and Long Weight of Money Moving Average highlight simple scalp, swing and momentum trades in the pre-race markets.

Most importantly you need to decide on your opening pot, you need a willingness to learn your new trade or platform and the confidence that your mindset is strong enough to cope with this type of career.

So just for the record what has since become of the poor online casino operator.

By Oct 2 2006 from a peak of 176p PartyGaming was down at 47p, following one of the biggest one day losses (56%) in FTSE 100 history.

Today it totters happily around 25p, a realistic price/earnings ratio, using a realistic and sustainable business model without flouting any established legislation.

Who knows, with the recent change of leadership in the US, the gambling legislation may be reversed and the reverse fortune could occur for this particular operator.

What can we take from this cautionary tale as we sail off to the betting exchanges; Quite simply, make volatility and liquidity your best friend and ally, as the alternative situation could truly represent Armageddon for your finances.

What can we learn?

1 Learn to spot trends early on.

2 Identify and analyse potential risks using fundamentals.

3 Use technical analysis software to take the heat out of timing your trades.

4 Get in early before the herd stampedes onto a likely winner. 5 Get out early before the herd flies over the edge of the cliff.

Remember if volatility scared you in stocks it will terrify you in horse racing.