Welcome to Part Two of my New Trader Guide. Last time, we covered some basics.
This time, we’re going to discuss how to avoid the many traps that new traders can easily fall in to.
If you want to make a lot of money in trading, the first thing to learn is how not to lose it.
This isn’t like Football Manager where you can restart the game if your season doesn’t start well! It’s real money.
The last thing we want is for our new trader to get burned and bomb out in their first week. It could put them off what could have been a long and successful trading career.
A (very) short history lesson
First of all, it’s well worth new traders understanding more about the market, why such big returns have been possible, and to what extent that might continue in future.
Football Index is still young. It’s a totally new concept and has taken a while to get going. It was pretty much a cult product working from Media only until Performance came in for the start of the 17/18 season.
In any new market place, early adopters get huge opportunities for big profits but over time as the market matures it always gets tougher.
My personal opinion is that the product is really starting to catch on. I think traders joining in 19/20 are still relatively early and I expect the product to continue to grow and eventually break through to the mainstream. The team behind FI themselves have generally shown they can make the right decisions to drive the product forward.
But, it is going to get harder to make profit when the market matures as the seasons go on. In my view, eventually even the best traders are going to be content with 30-40% annual returns rather than the 200%+ they may be used to. Average or poor traders are going to start losing money. It’s hard to pinpoint when that will start happening.
In the past two years, even average or poor traders have made good money because the market is so forgiving. Such traders may be dangerously convinced of their genius (the sort of people who say things like “the only way is up!”) and that can really bite someone later on because they have learned so many bad habits.
My focus for this guide is in setting people up for long term success.
Any fool can profit when the whole market is rising. But if you learn to be street wise, learn to manage risk and avoid taking losses you will not only make more money now, you will set yourself up to keep making money long after most average/poor traders have been wiped out.
Find good sources, helpful people do exist. But stay sceptical and always think for yourself.
In all forms of trading, you are often profiting at someone else’s expense. Particularly when social media is involved, that can put the worst of human greed and dishonesty on display and it is no different on FI.
Lots of people get quite angry about this kind of behaviour, particularly if they take a loss to a “pumper”. But this sort of thing will always be a part of trading. We won’t change it so we have to be street wise and learn to look after ourselves.
There are helpful people out there and over time you should get a feel for who has a good reputation or a bad one, and whose ideas make sense to you. With good sources you may be able to look back at someone’s post/blog history and see how good their analysis turned out to be. But you should be wary of following any advice or tips from anyone without thinking it through for yourself.
“Pumpers” are people to be particularly aware of. These are traders who buy a lot of a player then tip them heavily in hope of raising the price. Some will know the player is garbage, some may genuinely believe in them and may be right or wrong. But always be wary of anyone pushing a specific player.
In my experience, the majority of pumpers tend to be fairly easy to spot if you know the signs. They will usually be obsessed with a very small number of players that they will shoehorn into conversations all the time (often as if they raised them birth and were the first to discover them which is often total rubbish!).
They will often talk in absolutes: “Guaranteed profit! Only way is up! This kid will be the next Neymar! I can’t believe how under valued he is!.”
Often, it can be accompanied by some weak stats that are eye catching but not that helpful on FI, like lots of goals in a weak/youth league with no reference to any of the other important stats that matter.
A lot of pumpers are obvious but there are some clever ones too. A “skilled” pumper will often target a player who is almost right. He will have some similar traits in common with another genuinely good player who has risen in price but be missing a critical attribute that is not mentioned or be years away from actually playing real football.
There are helpful people out there, though. Better sources will tend to be more balanced, covering a wider variety of players and discussing the positives and negatives of a player. They will usually discuss scenarios with the positives and the risks included. “This player may rise if X, but he may fall if Y.” They’ll tend to include a wider variety of stats to support opinions and show FI relevant knowledge. And, they’ll tend to do more than just talk about individual players. Maybe covering non player specific strategy or other FI related topics too.
But either way, the golden rule here is to do your own research on any players before buying or selling them no matter who has made you aware of them.
Even if the “tip” you follow turns out to be a good one, you cannot consistently trade successfully if you don’t know why you hold what you have.
If you are just holding them “because X tipped them” you are in big trouble. How do you know when to sell or hold if you don’t know why that player is valuable?
Forget about luck, good or bad. Don't be a victim. Manage your risk.
In my New Trader Challenge in 18/19, I made a 220% profit, publicly blogging each decision along the way throughout the season.
Obviously, good player selection and knowledge of the market is needed for those kind of returns and that will be covered in the advanced guide.
But if anyone asked me the main reason I have consistently made such strong returns, I would say it is because I very rarely take any significant losses.
That’s not good luck. And it’s certainly not because I get every decision right, nobody does. It’s just good risk management.
A good trader with strong market knowledge and player selection skills could be very happy with getting 7 out of 10 player selections right, provided they can cut off the 3 that don’t go as planned before too much damage is done. We want to make big profits on our good trades and small losses or break evens on our bad trades.
Risk management boils down to making a judgement about 3 things:
- Price
- Dividend Returns and Potential Dividend Returns; and
- Uncertain factors (transfers, pitch time etc)
Price is everything. Selling a player who has risen and done well for us takes discipline. But no matter how good the player is, if the price is too high versus any realistic prospect of dividend returns in the next season or two, that player has become high risk.
Persisting with holding players who have a price far above any rational value (remember from part one, dividend returns and potential returns are the only source of real value on FI) is straight up losing trading.
By holding players too far above a rational value, particularly if they are being hyped up and pumped by other people, you are asking to get burned. Should any misfortune happen to that player (wrong transfer, dropped to the bench, major injury) you are set for a big loss because there is nothing of substance to prop up that price in rough times.
Never blame bad luck if this happens, blame yourself for holding an overpriced player too long
Secondly, even if nothing bad happens and he goes on to rise a bit further, you have still probably reduced your gains without even noticing. Let’s say you have made your trade of the season, picking up a 50p nobody who broke out as the next big thing and has hit £3.50. Amazing.
By the time you are holding at £3.50, you are carrying the most risk for the prospect of the smallest gain.
Most of his rise has been and gone. There is no sensible reason to do this, unless you have become a fan of the player and are trading for fun, or you are a genuine true believer that this guy is the next global super star.
As a reality check, the failure rate of “next big things” is huge. Only a handful of players can become global stars and pull in the media returns that these players do. 99% of players who get called the next Neymar or Ronaldo aren’t. He is just as likely to bomb out and end up on the bench at Stoke. It’s generally not a smart thing to bet a stack of cash on.
Instead, if you have cashed out at £3.50 and moved that towards a genuinely good player who has potential and might be more towards 50p to £1.50, you are moving your money to an area where you have the chance of a bigger gain. And, being more out of the spotlight and not pumped yet, he is likely to be lesser risk.
It takes mental strength and discipline to not chase what you see people pumping on social media. And, your portfolio flying up and down because you are jumping on every social media pump going may be thrilling. But to me that sounds like an exciting way to get mediocre results.
A few things to watch out for
First up is the official FI Tip of the Day and the FI content that pushes players in general through blogs and such. Traders should be wary of this, new traders in particular might assume FI are tipping well/responsibly.
But even if these tips were good (they are ropey at best) I do not think it is FI’s job to pump up players.
This tip, although a bit late, was actually a good one for a promising player. This just happened to be the tip of the day the day I wrote this guide! But no hoper players are peddled here more often than not. Main point is, always be wary of this. The official tipper here doesn’t know anything other people don’t.
And there are plenty of people predictably waiting to exploit the tip of the day by immediately buying it and then dumping to catch out any unsuspecting traders who followed it later.
I like and trust FI as a company overall and think they do a great job of running a market. But I think they should stick to that and not get involved in pushing players as they do.
The content they put out recommending and discussing various players is, without being unfair, either misinformed or deliberately designed to stoke up the market and fuel particular trends. It should be taken with a pinch of salt.
This is the Top 200 on a typical day sorted by the pence the players increased by.
Because the list is sorted this way by default, this market activity gets FAR too much attention. It is the percentage increase or decrease that shows you where the real money is moving, not the pence.
For example, in the above list, that 8p rise in Alli is worth far more than the 10p rise in Kroos, because Alli’s price is much cheaper (1.7% profit on Kroos vs 5.1% on Alli).
Yet, people feel good about topping this pence rises list and some will be crowing on social media! 🙂 It doesn’t mean they made the most money, though, and it doesn’t mean you have to pile in and follow them.
The first thing many people instinctively do is login, check this list, then go “Hey, this player is rising, I’ll buy!”. (And the opposite is true on the reverse of that list. If people see a player dropping they want to sell.)
This human herd instinct to be with the crowd is a killer in trading, and one which a good trader must learn to manage.
I will almost never let a price movement dictate my trades in this way. A confident trader who knows what they are doing leads rather than follows the market.
By the time a player is hitting this list, they have probably already been pumped and I have probably missed that boat.
Extremely often, the player who is topping this list today will be topping the fallers list tomorrow. What has gone up quickly often comes down quickly.
I said almost never. There are exceptions. Through the course of my research, I will often be aware of several players who I have high hopes for, but I might not own them. I might have decided to wait, expecting them to rise a bit later but not seeing a desperate need to hold right now.
However one of those players may do something to get attention and rise. Fair enough. If I know I want the player, AND I still think he is value at his increased price, AND I have good reason to think he will rise further I may well buy.
This is a rare thing for me though.
If a new trader wanted a hard rule to keep them out of trouble, “never buy anyone who has just spiked in price” would be a good starting point.
In fact, it is often in the reverse of this list, the players who are dropping in value, where the best profits can be found. That’s counter intuitive. Traders like a comfort blanket of knowing a player has risen recently. They hate to see that people have been selling a player.
But that instinct should very often be resisted and flipped around in trading.
Of course, your player analysis has to be on point, buying a dropping player only works if the player is actually good and likely to rise again!