Why Trading High Probability Setups Isn’t Always the Best Move

When I was at university, I had a friend who was really into horse racing.

Some days when I was procrastinating from my uni work, I’d join him and go down to the bookies. He’d stand there watching the TVs and bet on the various horse races.

Most of the time he was betting on an outside bet and only occasionally on the favourite, and it was never just based on the funniest sounding name like my bets were!

So I asked him what his process was. If the favourites were most likely to win, why wasn’t he just betting on them?

That’s when he told me something shockingly obvious and surprisingly simple that has stuck in my mind to this day, and it has impacted the way I approach my trading.

He wasn’t looking for which horse was most likely to win. I know, that sounds a bit counter-intuitive!

He was looking for the one that presented the best value.

In other words, if the race was run 100 times, which horse would generate the best return? It might be that a horse has odds of 100/1 but if he thought it would win even just 5 times out of 100, it’s likely to be a more profitable bet than backing the favourite, even if it’s unlikely to win.