Part Two: Market Direction and Trends for 2018/19
Before we can even think about what players we should buy, we need to consider where the market is going and what our overall strategy is going to be.
In Part Two of this series, I’ll be focusing on the season ahead and where I think the Index is going in the next couple of years. I will also cover the cast iron trading principles that shape my strategy.
In Part Three, which I will likely publish on Monday, I will cover the specifics of my strategy and my overall plan for the different stages of the season.
Originally, this was going to be a two part article, but as I started writing I realised it definitely needs three!
In Part One, I looked at the year gone by to assess my performance and learn the lessons. I had a fantastic year, but as that article concluded, many of the reasons I profited so much including the World Cup will not be there this year.
We can’t just keep repeating the same formula and expect to keep winning. Market conditions change and we have to adapt.
Overall Market Direction
The past year has offered extremely favourable conditions to trade. With the Index still relatively new, even after all the rises we have seen, the good players still remain fantastic value compared to other forms of interest or investment.
However, there are plenty of duds in there too and if you make poor choices it is still very easy to get burned. Even here, there is no such thing as a free lunch.
Traders have lived a charmed life in the last year or two, the odd speed bump aside, we have seen continual growth.
My concern with this is that many traders will be frequently making poor decisions that get glossed over by the overall rise. Simply put, their gains will convince them they are way better than they are. When the market eventually pulls back (and all markets have their ups and downs) these traders will be vulnerable to heavy losses.
But overall, I am convinced that the Index will continue to grow, and fast. The introduction of performance buzz really took it from a slightly odd niche product into something that football fans are going to take seriously.
You only have to look at the number of people who play fantasy football to know that these sorts of games have mass appeal. Combine that with the prevalence of sports gambling and I can’t see the Index being anything other than a hit.
The ramped up advertising including on Sky Sports should really see it break into the mainstream over the next year or two.
And then you have expansion into new territories, most recently Sweden.
All in all, I think these are very good reasons to believe that the party will continue for at least the next year or two.
Beyond that, who knows. Eventually the market will saturate and the returns on investment should gradually decline assuming dividends stay at current rates. That is nothing to be too worried about, it is natural once a market gets firmly established.
What this confidence means is that I am going in hard. To paraphrase a trading quote “when it is raining gold, put out the bucket, not the thimble.”
I’ll be monitoring things carefully and if anything fundamental changes, I’ll adapt and deal with it.
But in these favourable conditions I’ll be working hard to make as much money as I can.
Trends for 2018/19
As I see them, the following are the key trends for the year ahead which shape my overall strategy.Premium Players – Will they rise forever?
Before we decide whether to include premium players in our portfolio, we need to know what returns we can expect for the money.
This allows us to make a prediction about their maximum rationale value. This in turn tells us how far they might rise, and allows us to compare their value with the mid and low price players.
So how expensive can a player really get?
An average price for the top 5 players is now £10.10 and their average dividend return was £3.10 last year. That’s a 30% return plus however much they rise in value.
Last year, that value rise was a *lot*. You could pick these guys up for £3 and under back then. I, and many others, made huge profits from this. But that won’t happen again, almost certainly not next year. They are not going to 4x and 3x in value unless dividends are ever increased.
A 30% profit + a more modest value increase is nothing to be sniffed at. If you offered that to most people in other forms of investing, they would snap your hand off.
A challenge for the premium players is that they are not competing with the 3% interest you can get from a bank. They are competing for the bankrolls of traders who can also choose mid and low priced players who are routinely offering 50% – 200+% returns as their value increases.
When a player approaches £15, that average return drops to 20%. And then at £20, to 15%.
These numbers are of course huge generalisations. Something could happen to one player that makes them win an extraordinary amount of dividends and rocket in price. Equally, they could decide to move to China and lose all value.
But let’s say we accept those figures as an average for the purposes of discussion.
I consider the maximum rationale value of a premium player to be around £15 with the dividends at current rates. Allowing for market hysteria, I would not put it past people driving it closer to £20 at some point.
At the £15 mark and 20% average returns, I just don’t see enough traders wanting to keep money there whilst far greater returns are on offer in the mid and low price bracket.
For every trader like me who is active and confident they can winkle out the players who will get the 100-200% gains, there will be others who prefer a steady dividend income.
Also, if you have a very large investment and can’t find enough mid or low ranked players you are happy with, the premiums are a decent place to park a lot of cash.
For those traders, although more profit is available elsewhere, big holds of premium players are completely rationale. And I think there will be enough traders attracted to that as the platform grows to support £15.
To support values greater than that, I think we would need to see dividends increase. Personally I do not expect that for a year or two.
Frankly, it just isn’t needed from a business stand point. Traders are already getting more than enough value to keep us interested.
Another argument in favour of long-term holds of premium players is that as the market matures, dividend wins will become more important as rocketing player values become much harder to come by. But I think we are at least a year or two away from that point.Mid Price Players
To me this is the £3-6 range. I expect big growth here, particularly for players who show consistency this year having performed well last season.
At the top end, we are looking for the players who have the potential to take over from the Messi’s and Ronaldo’s in the next few years, such as the Dybala’s, Hazard’s and Bale’s. But from these, we also want plenty of dividends now.
This is also where many of our strong performance based players can be found. If the likes of Depay, Fekir, Lo Celso and James Rodriguez continue their form from last year, traders will want to snap up these consistent players for long term holds.
It won’t go unnoticed for long that many of these players have higher percentage yields than the premium players. And all whilst having better prospects for value increases.
I believe that the price gap between the consistent high performers in this bracket and the premium players will close over the season.
If our premiums cap out at £15, our best performance players should start hitting £6-£10.Cheap Players
At this point I probably have to consider anyone under £2 cheap. Although for the real bargains I would be shopping at under £1.50.
In this market we are going to be taking bigger risks for potentially higher rewards.
These are the youngsters, squad players and “he will be good if” types.
At the right price, they can be great calculated risks for traders who do their research properly and buy early well before they are hitting any headlines and topping the rises list.
We will see some traders getting huge profits from emerging players in this bracket.
We will also see many traders getting burned badly by foolishly plowing into over hyped garbage because they are chasing a rise. No matter how many times this happens, some people can’t help themselves.
I definitely shop in this market but it requires diligent research and patience to get it right. If you want a quick profit and are not the type to spend all day with your head in a spreadsheet, I would recommend steering well clear.Young Players
One of the big trends in the last few months is the collective mania for young talent.
Everyone wants to be that guy who picked out the next Neymar for 90p a share and it is making people crazy.
Anyone following the blog will know my views on this.
I think these trades attract those with the gambling mentality. I come primarily from a trading background so perhaps that is one reason I find them difficult to understand.
There is a good 3 year hold argument for players like this. But I simply do not believe that enough traders really have the patience required for that, particularly the type of trader who plows into them after they have already risen.
There are so many ways to lose money on these trades. How many wonderkids never live up to the hype? Even if they do, they might not suit performance buzz or become a media personality.
If you buy 10 of these maybe 2 of them will make it. You only have to look at last years hype kids like Solanke to know that hardly any of them were worth having that early.
There are golden rules to shopping here.
Do your research, buy before they are popular, buy them cheap, and never, ever chase one that has risen sharply.
You also need to make sure you are genuinely ready for that 2-3 year hold and that when he drops in value can you take it. You may be patient, but most people are not.Older Players
There are several older players, David Silva being my favourite example, who have superb performance buzz pedigree. Many of them are relatively cheap because they have the opposite of the “what if” hope based mentality that drives traders to buy youth. Fear of decline or retirement keeps the price suppressed.
I think people will realise the value of these players as the season gets underway. We may have to time an exit carefully. But particularly in the early season, if they start performing they should catch a nice rise, and they will be consistent dividend returners.
Towards the end of the season, we may want to look to sell. But I think we can squeeze some more life out of these players yet.
What could change? This is a really important thing to consider. We have seen recently the dramatic positive effect that the bonus had on the market recently.
Unexpected events like this happen a few times a year and they can be positive or negative. We must watch out for them.The Order Book
A few months ago, the Index trailed their intention to introduce an Order Book.There are a ton of positive and exciting uses for an Order Book on the Index. But it also creates opportunities for it to be used by savvy and even manipulative traders to run rings around the inexperienced.
If you want to find out more about what this is, and what it might mean, here is my article on it.Rule Changes
I believe any changes to the scoring system will come slowly. The Index seem wary of doing this too much, as changing the terms of a bet can land them in hot water legally.
That said, the rule set does need to change over time. New traders are often mystified that the obvious best player on the park tanked in the performance scoring. Small changes to address that would help grow the platform long-term. But this will make some players worth less and some worth more, so needs to be done with care.
All we can do here is watch the news from the Index closely. If changes are to be made, I would expect them over the summer before the season starts.Trading Clubs and Bots
There are various ways the market can be manipulated, and we see it often. I think with the amount of money on offer these kind of market manipulations it will become more common.
There is nothing wrong with people discussing and sharing information, but when it comes to deliberate decisions to try to crash the value of a particular player etc, that becomes a different story.
We have to be constantly vigilant for this, particularly when there seems to be no logical reason for a drop or a rise. Often though, they will be timed to coincide with a piece of news and supported by social media accounts pushing a player or trashing them to fuel the flames.
We must also be careful never to get swept up in a herd mentality. Ultimately it is fine to look at tips and advice from others, there are helpful people out there. But at the end of the day, make sure you are happy with the trade and are not just blindly following someone else.
Trading Bots will also be increasingly used, particularly if Order Books are introduced. My article on order books covers how to protect yourself from those.
Whilst my strategy is adaptable, I have some trading principles that are set in stone. I have carried these with me for years across various forms of trading and they have always served me well. My mindset comes from a (possibly slightly curious?) mix of classic trading theory and online poker strategy.Trade Tight Aggressive
Through careful research, I only buy players that I believe are near certain to make profit. I don’t go for the big gambles. This is trading “tight”.
And when I do find those players, I go in hard with a sizeable chunk of my bankroll and I do not allow minor speed bumps to knock me off course. Others can panic sell all they want, as long as the reasons I bought the player are still there, I am holding. This is aggressive.
One of my most popular articles was the comparison between successful trading and successful online poker. This explains my tight aggressive mindset better than anything else so for those interested, it is worth a read.
I have serious money in the Index and I treat it like any other investment. I only trade when research tells me I am very likely to make money. I never trade for fun or to add enjoyment to a particular match day. This is for mugs.
If you want a short term bet you get better odds at the traditional bookies. If this means not trading for days or weeks, that’s totally fine. Often doing nothing is the best decision you can make.
Trade for the long term.
95% of my activity is long term trading. I very occasionally do some short trading but only when it is an obvious slam dunk. There are a few reasons for this. First of all, it suits my analytical strengths. Secondly, it fits much better with my lifestyle. I’m busy and I don’t want to be glued to news feeds all day waiting for something to happen. Nor do I want to watch every midweek La Liga game.
I get my kicks out of consistent long term profits where I watch my portfolio tick up most days. I’m not chasing thrilling big wins because I don’t want the inevitable heavy losses that come with that style of trading.
When things are steady and only ever going in one direction, it’s easy to stay level headed and focused. And there is nothing to suggest either on the Index or the stock market that short-term trading earns you more money for your extra effort. In fact, over trading is probably the biggest mistake I see when people email me asking why they are making losses.
So far, we have considered the broad environment we will be working in and the principles upon which my strategy is based for the year ahead.
In the third and final part of this series I will set out the juicy details of my strategy and my overall plan for the different stages of the season. I expect to publish that on Monday.
I hope you enjoyed Part Two and found it useful. I find writing all this down really helps to collect my thoughts!
See you next week for Part Three.
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