Risk vs Reward

Right, so we are gonna kick off these trading guides with the fundamentals. These basics need to be in place before we start looking at the actual methods and possible strategies.

We see the term "Risk vs Reward" thrown around a lot when we talk about investments, but what exactly does this mean?
 

Risk

When we look at the risk of an investment, we are simply looking at the factors that could potentially damage our investments and to what level. We need to remember that this is made up of two parts:

1. How late we are making the investment (is the price already inflated and to what level, how much profit is still possible)
2. How likely the investment is to succeed (is this too big a risk and are we placing our funds into an investment that could be deemed too risky)

Reward

Well the reward is simple, we are talking about how profitable we expect our investments to be. If we invest in a player for X and estimate the selling value at Y, the reward is simply Y - X. While the fundamentals are easy, we also need to take into account that if the investment goes wrong, we could be looking at a different equation. If we invest in a player for A and without hype his market value is B, we could stand to lose B - A, this is where the risk and reward need to be taken into consideration.
 

Scenario One

After game week one of a new month, Lukaku has scored a hatrick. You believe this puts him ahead of the competition for the POTM award and hence decide to start making some investments. You have started investing extremely early here and the majority of your investments should still be sitting around their actual market value. This clearly reduces the financial risk to basically 0, but there are still other factors that could potentially make this a worrying investment.

Just how likely are these investments to come off? Well we are only 1 week into a 4/5 week month, this hatrick could be the only thing he does during all remaining games and as a result leave him nowhere near the award and your investments nowhere near paying off. We also have to predict which cards to invest in. Its not like we are guaranteed to guess the requirements right and hence your investments could be left high and dry when the actual SBC is released (this factor isn't so much of a problem luckily as we usually sell of hype, but it is still worth consideration). The final factor to consider is the length of time you are holding onto these investments. At this point in time we have roughly 1 month until the actual award is presented, this means we have 1 month of our funds being tied up, our trade pile being full and a limitation on what we can invest in during this period.

In this situation the financial risk is low and potential financial gain is high, you are almost guaranteed to make your coins back at worst. This makes it a fairly strong investment. Before we pull the trigger though, we need to consider the other risk factors.
 

Scenario Two

After game week two of a new month, Lukaku has scored yet another hatrick. You believe this puts him way ahead of the competition for the POTM award and hence decide to start making some investments. We are now potentially half way through the month and Lukaku is looking like a very strong favorite. Unlike scenario one, we didn't start investing that early and hence prices have started to rise, anything we now buy we will be buying at an inflated price.

The first thing we need to remember is that this doesn't make this a bad investment! There is still an incredible chance that Lukaku wins this award and hence a strong chance our investments return a profit. However we do need to remember that the risk is much higher than it was on week one, and hence our decisions require more thought.

The reward formula remains the same, what we buy the player for against what we expect to sell them for, Y - X. At the same time we need to need to remember that if this investment turns bad we could stand to lose from this formula. This is when the term risk vs reward really comes into play!

If this investment pays off you stand to make X, while if the investment goes wrong you stand to lose Y. Is the chance of gaining X worth the risk of losing Y? This is fundamentally what risk vs reward means, and these are the tough decisions you need to make.
 

Scenario Three

After game week three of a new month, Lukaku has scored a third hatrick. You believe this puts him miles ahead of the competition for the POTM award and hence decide to start making some investments.

He has been a front runner from day 1 and is now practically guaranteed this award. Almost any investments you make will come with incredible risk and should be avoided at all costs. You are buying these cards at a price that has continued to rise over the past 2 weeks and are therefore at an all time high. Any profit margins are likely to be minimal and hence usually makes the risk vs reward equation very unappealing.

This doesn't mean we cannot invest, it just means we need to become more creative. Revert back to scenario one, any cards we pick up now we are going to be holding onto for a week or two at most. Think outside the box, think of potential challenges very few others are thinking about and pick up these cards for their market value. Yes it becomes less likely these cards will be needed, but all we need is a little hype or a little luck and then we are making profit again. The key with this decision is that we are removing the financial risk, adding a shorter timeline of holding onto the cards and hence weighting the equation in our favor.
 

Summary

When investing, use this basic formula to determine how profitable you predict your investments to be at both the best and worst case scenarios. Using both figures you are left with the simple question: Is the risk worth the reward?