RiskSimulator


I have written a simple RiskSimulator for level stakes betting that I will be presenting in a future issue of Smart Sigger magazine. The application permits up to 100,000 bets to be simulated with graphical outputs. The user enters fair and bookmaker/exchange odds, a Monte Carlo simulation handles the rest.

When the simulation is complete the yield, risk of no profit and risk of ruin are output. Also, two charts are output; a time series progression for the bankroll and a histogram of variance.

Although using standard statistical methods such as binomial distribution will provide more accurate results the simulator provides a more easy to understand visual representation. Also, a binomial distribution is based on an infinite number of trials. As nobody bets an infinite number of times a Monte Carlo simulation can show the user the wide variation from what is expected with any betting system.

Future work will include a StakingSimulator for users to investigate the worth of various staking systems, including level stakes, proportional stakes, Kelly Criterion and guaranteed losers such as Martingale and Fibonacci.

How to Find a Black Cat in a Coal Cellar

http://www.amazon.co.uk/gp/product/1843440679?ie=UTF8&camp=1634&creativeASIN=1843440679&linkCode=xm2&tag=thegoodlife08-21
Being a technical trader in sports betting markets I have no interest in tipsters. However, I do enjoy reading any mathematical book on sports betting and the mathematics contained in this book are valuable even to those who don't use tipsters but develop their own trading and betting strategies.

How to Find a Black Cat in a Coal Cellar is written by Joseph Buchdahl, author also of Fixed Odds Betting, another book I highly recommend. Buchdahl attempts to show those who use tipsers (also called advisories) how to evaluate their performance.

Although the book is primarily for readers who want to evaluate tipsters, in effect the book is for the evaluation of any systematic approach to betting. Therefore the book is important to anyone who wishes to evaluate their own strategies as if they are tipping bets to themselves.

The first chapter is a description of how various forms of betting work and how the aim is not just to pick winners but winners whose odds give you an edge in the long run. Not news to experienced bettors but you will be surprised how many people still don't understand that just picking a winner is not enough.

You can't predict winners all the time so your winners have to compensate for the losers. Hence, the odds on your winners must be higher than your predicted odds so that you hopefully gain a profit. The first chapter goes on to explain the overround and how that eats into profits. The chapter also covers market inefficiencies such as favourite/long-shot bias, the over-betting of under-dogs and under-betting of favourites.

Finally, the first chapter covers staking and money management. Not exhaustively, as the author covers the subject in more detail in his previous book, Fixed Odds Betting. Needless to say, Buchdahl is against progressive betting systems such as Martingales but he is pro Kelly staking for the maximisation of returns.

In the second chapter we begin to see a methodology for evaluating betting systems be they from tipsters or created by oneself. Again some fairly familiar terms are presented; Return on Investment and Yield. Worth a read for revision, if you think you already know all about it. Many don't.

A positive yield is not necessarily going to make you rich. It's not like a bank account offering 5% per annum and you get all your money back from the government if the bank fails. Buchdahl shows by way of a simple example that even a losing strategy has the potential to yield a profit 30% of the time simply because of variance.

The chapter then proceeds to show the affect of low edge on variance. The lower the edge you have over quoted odds the greater your variance. You could show quite a run of profitable bets even with no edge at all. Worse, you could easily lose your bankroll.

Also shown is that the higher the odds you bet also affects variance. Again, the higher the odds, the higher the variance. Efficient market hypothesis tells us that market odds are close to true and so higher odds win less frequently, adding to the variance if the yield is quite low.

Even if you have two systems that yield 10% profit, if one is betting at higher odds than the other then its variance will be greater than the other and will have a greater chance of losing the bankroll than the other.

The chapter continues by introducing the t-test for statistical significance. Essentially, this is giving the reader a value for the probability that a tipster made their profit through chance and not through skill.

Chapter three covers value for money. Tipster subscription fees are factored into rates of return. Buchdahl looks at what the naive bettor can achieve by themselves and what a tipster can add to that. Arbitrage is covered as a way of guaranteeing success without the fundamental knowledge purportedly known by tipsters. If a tipster cannot beat simple arbitrage then they are no good at their trade. There is also an account of Buchdahl's attempt to win a last man standing competition using value betting.

In chapter four Buchdahl evaluates tipsters and their records. Buchdahl goes through many tipsters and their reported success rates. I won't go through any of it here as the data is in the book and the maths used to evaluate the tipsters has already been mentioned.

The level of unprofessionalism and charlatanism displayed by some tipsters is not unsurprising. Amateurish strategies involving the chasing of losses as an attempt to boost profits are evidenced. The closing down of initially profitable tipster websites, reminiscient of beginner bettors who boast of their skills on blogs that are soon left moribund when the profits start heading south.

In chapter five Buchdahl makes his assessment of tipsters. Most he says, are amateurs, half of whom make a profit but far fewer than that can claim to do so through skill rather than by luck, as has already been shown mathematically. A lot of tipsters "cook the books" and after they have been verified by a tipster evaluation service, such as Buchdahl's own http://www.sports-tipsters.co.uk service, profits usually diminish.

Finally, in chapter six Buchdahl show the reader how to professionally go about evaluating tipsters, not just mathematically but carrying out domain checks and web searchers to see if others have reviewed the tipster as legitimate or a flim-flam artist.

My review is not really enough to do justice to this book. There is so much of value to be read. The book will help you to determine which tipsters, if any, are as good as they claim. The book will also improve your own (self-tipping) strategy building.

I recommend that you have Excel or other spreadsheet software close to hand so that you can feed the functions provided into a spreadsheet and experiment with them. You can then have the functions on hand to remind you of the important facts contained in this book.

This book certainly ranks amongst the more important books on sports betting.

Amazon - How to Find a Black Cat in a Coal Cellar

Also recommended - Fixed Odds Betting

Traders: Millions by the Minute - Part 2

Last night the BBC broadcast the second programme in the two-part series entitled Traders: Millions by the Minute. The first programme showed the professionals making millions by the minute, the second programme did not. Instead, with one exception, we got to see amateurs, losing.

The fact is that the vast majority of home traders lose money. In financial trading it is easy to make money in a bull market, you buy and hold. In volatile markets there is the temptation to trade the swings, long and short and with disastrous results.

The problem for financial day traders is that most markets are rigged for the benefit of the professional élite. If the price isn't rigged then the market you trade in will be. Either the price is manipulated or the market you trade in is front run.

Sports trading is a different matter but still, most sports traders are losing traders. Although sports rigging is commonplace and insider trading in horseracing is common too, the playing field is more level between the professional and amateur bettor. Buy and hold lasts only until the end of the event so most trades are very much day trades.

In last night's second programme we saw a house wife making a million but only on paper. When she started using her own money, she lost. A common occurence for traders. The psychological aspects of using your own money are vastly different to paper trading. You will take more risks on paper and may get a long run of success, reinforcing in your mind that you are a good trader. However, that may just be down to luck. After all, a risk taking loser on paper would probably not want to trade with their own money. We got to see a lucky loser on paper, lose it in reality.

When you start using your own money you might be more cautious and the reality of being just another trader snatching pennies in front of a steam roller might be too much to bear. You either give up because you are not going to be as rich as you thought or you take on more risk and blow up.

There was also a team of retirees gambling their pensions on the stock market. They looked and acted professional but even they started to lose money. Again, they found it easy in a bull market and got out of their depth through over-trading a volatile market.

A former antiques dealer knew all the terminology but he just couldn't trade. He was happy to lose money, year after year, to keep him from selling another chest of drawers.

There was a pair from Birmingham but I didn't know what to make of them. Maybe the BBC's usual multi-cult shenanigans in action. We saw the pair in their parents' house plotting to become 'trillionaires' then driving off in a flashy car to drum up business from black footballers. At least they had the sense to risk somebody else's money. At the end of the show, and unlike the other traders, we were not told how they were getting on financially. I suspect they are still living with their parents.

The only winner I could see was a rather narcissistic chap. He had made over a million pounds from day trading and had been given a multi-million pound fund from The City to trade. The narcissist probably has all the skills needed to be a winner; single-minded, self-absorbed with a touch of obsessive personality disorder. His house was immaculately clean, his body immaculately toned in a gym, his Porsche gleaming immaculately in the sunshine. A life dedicated to being good at everything and that includes making money.

BBC iPlayer - Traders: Millions by the Minute

Traders: Millions by the Minute

An interesting two-part documentary series on the BBC this evening, Traders: Millions by the Minute. The series shows us pit, hedge fund, electronic and algo traders at work in Chicago, New York, London and Amsterdam.

Chicago's CBOT is still the scene of pit traders in the grain commodity markets. Although many exchanges throughout the world have gone electronic there is still some liquidity in certain commodities for face-to-face trading.

However, most trading is now done electronically, either by humans at a screen or algorithmically without human intervention. In London we see Amplify Trading, an electronic trading firm, training newcomers with mixed success. I am sure you will notice yourself amongst the trainees, some of whom are scared to trade and others trade too much. A few pass and are given jobs at Amplify or trade on their own accounts.

The hedge fund trader in New York was less interesting, as we mostly see her family and philanthropic life rather than her work. The high-frequency trading in Amsterdam could have been more interesting but a computer trading at the micro-second level probably doesn't make for good television.

All-in-all a fascinating view of people in the world of trading and maybe inspiring to sports traders too. Part two is next week and will concentrate on day traders working from home, which will probably be of more interest to sports traders.

For my readers in the UK I provide a link below to the BBC iPlayer where the series will soon be available to view. In good time I am sure the series will find its way to YouTube and shhhh... BitTorrent, as does everything, eventually.

BBC iPlayer - Traders: Millions by the Minute

Is it time to turn to a bot?

A bot is a virtual robot, which performs simple repetitive tasks for you. Bots are used in trading to perform trades without human interaction.

Whatever online task a bot does, if the task is simple and predicatable then you should be using bots for all of those online tasks and not just in trading.

I recently downloaded SleepBot for my Android phone and it has already made a difference to the quality of my sleep. I have so much more energy when I wake up at 6AM to start trading.

Time means money and wasting time doing things yourself will cost you money in the long run. Bots increase your productivity.

When should you decide to use a bot for your trading? Ask yourself this simple question, "Is my trading algorithmic, predicatable and profitable?" If you can answer 'yes' then you should be delegating tasks to a bot. If your answer is 'no' then you might consider a halt to your trading for obvious reasons.

Why sit in a chair trading one market at a time when one or more bots can be looking at all markets simultaneously? This is called scaling, through which you earn money from multiple sources in parallel. Wealthy people have scalable jobs, the poor do not. Not only that but you are diversifying your risk, which can only be a good thing.

If you find yourself doing the same thing when successfully manual trading then you should have a bot trading for you so that you can earn money elsewhere. If the entry and exit points for your trades are profitable and can be described algorithmically then you should give those trades to a bot whilst you design an entry/exit pair for another market

There is commercial bot software out there but for sports trading I find most of the software useless and so I code my own bots. But do have a trial run with the commercial software and see what it can do for you and what it cannot. Build a list of requirements and see what is out there that will satisfy those requirements. If you can't find what you are looking for then either code your own or pay someone to do it for you. An investment that is sure to pay you a handsome return.

I shall be covering bot trading strategies in a future post.

Betfair, a form of dark pool?

I recently made a comment on Bet Angel's forum as to whether or not Betfair's exchange is a form of dark pool. There is much talk on the forum with people in disbelief that trades seem to go against them the moment they send their order to the Betfair exchange.

A dark pool is a term from finance. Such a pool is a form of exchange for the anonymous trading of stock. There is no market depth feed in such pools so traders are in the dark as to what volume and at what price stock is traded in the pool. Also, the details of who is trading what with whom is kept secret.

Such dark pools lead to the creation of high-frequency trading (HFT) firms who flash dark pools with small orders to judge market sentiment before sending in larger stealth orders divided up into smaller chunks, distributed over many pools.

Also, HFT firms act as middle-men by grabbing stock just as a large institutional order is about to be traded and then selling to the institution at an inflated price, much to the consternation of many in the financial world. Think about it, your pension is being eroded everytime this happens. Your pension fund is built with over-priced stock! Michael Lewis has written an excellent book called Flash Boys on HFT scandals.

In many ways Betfair's exchange has elements of a dark pool within it. Trades are anonymous so there is no way of telling if two bots controlled by the one source (but on separate accounts) are trading with each other to create the illusion of liquidity.

More often than not an apparent trend during morning trading on the horse racing markets can be traded upon only to see the trend reverse immediately, orders cleared around the spread and bots sending in instantaneous new orders to reverse the weight of money and send the trend in the opposite direction.

It would appear that for most of the lifespan of a horse race's market on an exchange is just a battle of the bots, herding humans and less able bots on a merry-go-round of ups and downs, false momentum and illusory liquidity.

For myself, as a researcher in computational finance and bot designer, this is a challenge but for others trying to make a few pounds of profit, heartbreak. In a post yesterday I showed that Betfair is running a bot in tandem with its sports book. What if it has other bots in the exchanges too? Bots with no other purpose other than to fleece its customers?

After all, if Betfair is now a bookmaker and will have a rough idea of where odds are going. Reason enough to use bots to lead unfortunate traders on a dance to penury. With people beginning to see sports betting as an asset class (link requires free registration) like stocks and commodities then it is inevitable that larger concerns start moving into sports betting and bring with them their nefarious ways from the financial world.

Betfair runs bots too

If you trade on Betfair's horse racing markets then you might see an odd price grouping somewhat below the current lay price for all the runners.

For the favourite the offering will be £400 and there will be three such lays grouped with a two tick gap, sometimes three ticks or maybe more. The image on the left shows two £400s and one that has merged with another lay of £149 to give £549 at a price of 1.74.

I noticed this awhile ago and I wanted to try and understand what was going on. Obviously it's a bot but whose and why? I noticed that there are never back bets of a similar type so I assumed it was part of a 'lay only' operation. That means that it has to be a bookmaker's bot.

I call the bot the '400 Bot' due to the volume offered for the favourite at each price. For other horses in the market the volume offered will be lower.

Occasionally, the group of three offerings will drop as the price on a runner drops dramatically. Sometimes some of the topmost lay will be eaten into before the group moves further down the ladder. In anticipation of a further price drop?

I suspected that Betfair is running the bot. After all, Betfair now has a traditional bookmaking (sports book) operation in tandem with the exchange. Today, I watched the price on Betfair's sports book for the favourite in a race and just as the price on the book was lowered then so too the three lots of 400 dropped.

What the purpose of this is, I do not know. It can only be an exercise in getting to the front of the order book at those three particular prices. Nearer the off it is hard to get to the front of the order book so it is better to do it earlier in the day.

The groups of three are a little lower than the book price and naturally enough the book price is considerably lower than the exchange price. It's probably some sort of risk management device.

Whether this knowledge can be used to my advantage remains to be seen (and thought of) but I doubt it. Betfair moves these three lay bets in reaction to market activity and is unlikely to be anything predictive.