Generally in trading, stop loss is the price at which a failing trade is better to be closed. In terms of trading in sports betting, when the odds move contrary to our predictions, a stop loss order should be placed at those odds that would signal that the trade should be completed.
Three reasons why stop loss is necessary
- With the help of stop loss we can predict in advance the maximum amount of money we risk losing on a trade. As a result, we are prepared to respond if we have mistakenly predicted the odds movement.
- In addition, stop loss helps in the calculation of risk-reward ratio, which plays a significant role in the success of a betting system.
- However, the major advantage for the trader using stop loss is the strengthening of discipline skills. When a sports trader estimates wrongly a possible odds movement – a difficult but anticipated situation if stop loss is set – the only question that arises is whether or not the trader will actually show the discipline to close the trade at the exact exit point as planned. That exit point is defined by the mental stop loss.
The first time that the command should be confirmed and executed, the trader is more likely to be reluctant, risking the odds to possibly move even further against the initial prediction. Yet, after several incorrect predictions, the trader will eventually realize that the stop loss must be followed every time, as it is a shield against further losses. Eventually, the trader will acquire the necessary discipline and self control, which will be also helpful in other areas of trading or betting, when placing all kinds of bets.
Suppose you are laying a bet against a football team at odds of 2.50. So, you expect a profit from a possible rise in odds. The lower odds available for that bet are offered at 2.30 by other bookmakers. You decide that a good price for setting the stop loss on this trade is 2.20.
But, why not 2.28? The reason has to do with slippage effect, which we shall talk about in a future article.
Following a strategy with stop loss, you know right from the start how you are going to react if the odds do not increase as anticipated, but drop below the level of 2.30.
In this case, if you bet €1,000 on 2.50, your liability corresponds to €1,500. If you close the trade at 2.20 by placing an opposite back bet for €1,000, you have just managed to lock a loss of only €300 on that team and break even to other possibilities. By evenly spreading the loss (the exact opposite of greening up), a wrong prediction would have cost €135, no matter the outcome of the game. So, while your liability was initially €1,500, in fact, the amount of money that was put at risk on that trade is almost ten times smaller!
The above, of course, is true if you have the discipline to close the trade at that exact point, as you were meant to. If you allow the odds to move freely with the hope to turn the situation around in your favor, you may lose a lot more money, as the risk is increased exponentially.
If now the odds rise as predicted, at what point you would be happy to close the trade with profit? That point is indicated by the risk/reward ratio.
If you risk a drop from 2.50 to 2.20 at a cost of €135, you should also consider at what winning level it makes sense to close the trade, or at least a part of it. For example, if you decide to close the trade at 2.60, you win €100, which when greening up it translates to a net profit of €38. Are you satisfied with this ratio between risk and profit?
Another trader would opt to close the trade at 3.00. The target is a profit of €166 taking the same risk as you did.
Nevertheless, what is the probability of the odds reaching the 2.60 level and what to climb up to 3.00? Obviously different, otherwise everyone would expect the odds to reach 3.00!
How to set a mental stop loss order in sports trading
According to the chart, if you backed a bet of Hurt Locker winning the Oscars 2010 at 2.24 after the support level failed (blue line), the stop loss would have been set at 2.34, as the odds never went further from that point.
For now, what is definitely necessary is to understand the importance of stop loss in trading and the help that this strategy provides. If until now you are trading without knowing of its existence, perhaps you may already use a stop loss point unconsciously.
On the other hand, if you are about to make your first steps on sports trading, stop loss is one of the elements that will constitute an indispensable part of your strategy to follow in the future.
Finally, in regard to the best price level to set the stop loss, great help would provide identifying the support and resistance levels, along with the trendline. Still, these are not the only tools that could indicate the optimal point for setting a stop loss, but it’s a start!