In this post we are focusing on the square root staking plan, but the question still remains if staking plans are the root of evil, or the branch to success and increased profits?
Our series looking into individual staking plans uncovers the history behind each staking plan, why it was created, how it works, if it increases your profit and how much extra risk of losing your bankroll it creates.
THE SQUARE ROOT STAKING PLAN HISTORY
The square root staking plan is credited to being created by James N. Selvidge.
He called it the Base Bet Plus Square Root staking plan, also known as BB+SR, and it first appeared in his book Money Management published by Jacada Publications.
It was a method of staking that was also recognised by James Quinn, a well known US handicapper, as offering…
…the best return on money invested by the small bettor. That is, the risk factor associated with the method is as low as can be found anywhere.
The square root method of staking is commonly considered to be the best alternative to the Kelly Criterion, a method of staking which can be extremely volatile.
James N. Selvidge was also the author of a book called Hold Your Horses and used to teach a class in Advanced Thoroughbred Handicapping in Washington.
THE SQUARE ROOT STAKING PLAN TYPE
The square root staking plan is not a loss recovery staking plan. Instead it increases the stakes you are betting based on how much profit you’ve made over a set timeframe.
One if the big decisions to make is what that timeframe is. It could be daily, weekly, monthly, quarterly, yearly or all time.
Usually the only staking plans we suggest you use are based on the odds of the selections, such as this staking plan, or flat stakes.
However, there is a possibility that this may become part of our recommendations for a low risk way of increasing your stakes.
HOW THE SQUARE ROOT STAKING PLAN WORKS
The rules for the square root staking plan are nice and simple. It all begins with a base bet.
Your base bet is a fixed amount that you bet on every horse.
If you are in profit over your chosen timeframe, then you take the square root of this profit and add it to your base bet.
The two major questions are:
- Deciding what your base bet will be
- Deciding what timeframe your profit will be based on
Let’s look at how we do this in practcie.
STEP #1: Deciding Your Base Bet
To decide your base bet you can simply choose a one unit from your bankroll, or alternatively you could use the Kelly Criterion to determine the size of your bet based on your edge.
Using the Kelly Criterion to determine your base bet you would follow this sum:
((Winning Percentage x Average Odds) – Losing Percentage) ÷ Avg. Winning Odds
If you had a 33% strike rate and your average winning odds were 3.60 and average odds were 5.00, this would mean:
((33 x 5.00) – 67) ÷ 3.60 = 27.20
This would indicate a 27.20% of bankroll as the base bet. However, I’d recommend you only do a half or even quarter kelly, which means dividing this by two to get 13.61% or four to get 6.80% of your bankroll.
You calculate the base bet once, so if you had a bankroll of £100 then your base bet would be £6.80 or rounded down to £6, and then it doesn’t change.
STEP #2: What Timeframe Is Your Profit Based On
I recommend that you do this over the lifetime of your selections.
However, every day, week or month, you should be taking out some of your profit to pay yourself for the work you’ve been doing.
Whenever you take some of the profit out, you then should restart your calculations using the same base bet amount but the square root will be left on the profit in your betting account, excluding the amount you’ve removed.
As you can see, if you were taking the profits out every day then the staking plan won’t have any time to take effect. So I’d recommend if you’re using this staking plan you only take a percentage of your profits out weekly, or ideally each month.
Every six months or year you should reset entirely, remove all the profit you want to, re-calculate your base bet and start fresh.
STEP #3: When To Use The Square Root
To calculate your stake size you always use your base bet. This only changes when you have made a profit.
If there is a profit, then you take the square root of the profit and add it to your base bet stake.
For example, if you had a £6 base bet and you had made £30 profit, you would calculate the square root of the £30 profit to give you £5.48.
You add £5.48 to your £6 base bet for a total stake of £11.48.
To calculate the square root use the square root button on any standard calculator, or use the =SQRT(30) in Excel, replacing the 30 with your profit.
A WORKING EXAMPLE OF THE SQUARE ROOT STAKING PLAN
Now that you’ve got the rules you need to implement the square root staking plan, this is a working example to show you how to put it in practice, and it is based on a base bet of £6.
THE TRUTH BEHIND THE NUMBERS
Now we know how the square root staking plan works, and we’ve gone through an example, what we really want to know is whether this is something you should be using or not.
THE RISK vs REWARD
Starting with a £100 bankroll, the reward in the above sequence of bets was £315.52, a big portion of which came from a winner at odds of 36.
But how would the results have looked flat staking £6 bets or using stakes based on the odds of each horse.
Flat staking profit would be £236.94
Kelly style staking, as outlined here, and based on a 1% edge and £100 bankroll would be £3.02.
But that’s not really fair because the £6 stakes indicate a far higher edge than 1%. To get a similar stake size we’d need to push the edge up to about 25%, which in practice we’d never do. Doing this the profit would still only be £75.52.
The big issue with Kelly style staking is that it’s very hard to determine. your edge. With this in mind we tend to always go lower than higher, because if we set the edge too high we are almost guaranteed to lose our bankroll because Kelly staking aims to maximise bankroll growth.
Interestingly, the square root staking plan out-performed both of the others, and also solves the primary issue with Kelly type staking
This investigation into the square root staking plan has surprised me. Generally I don’t like staking plans because the majority tend to work by increasing your stakes during winning streaks to a point where you end up betting more on the losers during. the losing streaks than you do on the winners.
They tend to give an increased profit, but at a massively decreased return on investment and significantly increased risk.
Which is why I don’t like them.
However, the square root staking plan does not do this.
What’s clever about it is that as the profit increases you will be betting a smaller percentage of that profit. And, as an added bonus, if get a big priced winner the benefit will be significant.
In conclusion, I really like this staking plan, to the point where I will consider using it instead of the Kelly style staking for a simpler method, which reduces volatility and keeps bankroll growth as a premium.
Leave me a comment if your already a fan of this staking plan, or if this is a new one to you that you’re going to try.