The Paradox of Skill

Buchdahl's Squares & Sharps, Suckers & Sharks (pages 137 to 142) describes the paradox of skill, whereby increasing levels of skill within an environment results in luck playing a greater role amongst participants in that environment. This paradox can be applied to both sides of the trading coin; namely traders and the underlying assets they are trading on.

Leicester City's remarkable Premier League title win 2016 can probably be put down to a combination of Leicester City playing above their mean expected performance level and the usual suspects playing below their mean expected performance level. A season later and it appears that Leicester City have not only mean-reverted but gone through to the other side and are now playing below par. We will put Leicester's surprising performance to one side and deal with long-term trends. 

The usual chant from one soccer fan to another is, "You bought it!" Over the past few decades more and more top-flight English soccer clubs have been bought up by the super-rich, a trophy club to go with the trophy wife. Obviously, the wealthier the patron the more likely they are to buy a big name team. A wealthy patron brings a bigger budget and with that comes playing and coaching talent from across the globe.

Eventually, all the top clubs will be bought up by billionaires, leaving other billionaires with no option but to create their own Premier League champions through buying lesser teams, lower down the league and in the Championship. Huddersfield Town, for any of you billionaires out there? After all they do have a history of winning the old First Division title so they have pedigree.

When the Premier League has become the NBA of soccer, every team will be supported by a billionaire. With all teams paying for the best talent, the chances of another unexpected champion, in the mould of Leicester City, will increase. Teams will be much closer in terms of playing ability and medical/sports/data science. The paradox is then that luck plays a greater role than skill and anyone can win the title.

The same is true in sports trading. Every trader is looking for edge (at least, they should be). Wealthier traders and syndicates can afford the best technology, an ideally located server, the best mathematical and programming talent, hoovering up the loose volume before others.

Sports trading markets will become cornered by a select few, able to act upon information more efficiently than casual punters and the lone manual traders working from home. Increasing long-term efficiencies in data acquisition, processing and trading will mean that the big players make ever smaller returns until such time that luck alone determines which one makes a profit, if any of them.

There will still be punters having a flutter and naive beginners who think they can beat their technological superiors but, as with online poker, they will dwindle in number. Online poker is not as popular as it once was. Technology and skill have marginalised many and those that remain push money to and fro whilst the service providers rake it in.

Trading is like poker, as the winners depend on there being enough losers to reward their activity. To be a winning trader requires the best algorithms, coupled with the best equipment to give the best chance of winning. As traders become better informed and better equipped there will be a levelling out of trading ability and the gap in skills between the winners and the losers will decrease. Subtract commission and winning traders might not make enough to make trading viable.
Sports trading will go the way of online poker with luck playing a bigger role, even for the most skilled traders. Of course, certain vendors, educators and unreviewed video and pdf providers will deny the validity of this article. I hope that I have put forward enough logical reasons to demonstrate that the paradox of skill is true. So why bother trading? At present, the sports trading equivalent of the technological singularity has yet to arrive but that day will surely come.

There are still plenty of people on the exchanges who are still gambling; using hunches rather than back-tested strategies, using tipsters to do their thinking for them or using their gut feelings rather than their heads. Some get lucky and boast about their (soon to mean-revert) success online thus creating the illusion through survivorship bias that their techniques are valid. Such traders are the ones who compensate the real winners, those who consistently win through hard work.

Every day, there are more traders who become better informed as to the correct way to bet and trade, how to use the latest technology, who take up algorithmic trading instead of manual trading. There are also those who refuse to learn, bust out and are never seen again. Those who are pre-determined to fail will become fewer in number as the overall skill level of traders increases to such a point that it is hard for anyone to profit. In that instance, sports trading should be treated as a failing asset and dropped from the portfolio. Until then, get it whilst you can.

Further Reading 

The Success Equation - Michael Mauboussin

Review of 2016

The year was a shock to those who backed the favourites in the two big political events of the year, thus demonstrating that nothing is ever "nailed on". I suggested a hedge position for both events should the non-favourites win, which they did and overall the hedge proved profitable. The world is ever more a chaotic place and year by year those who wish to control us, in all aspects of life, find it harder to do so.

The standout book of 2016 is Squares & Sharps, Suckers & Sharks by Joseph Buchdahl. The book should be read by many more than who appear to be reading it. Maybe people don't like to be told how much hard work is required to be successful and prefer their own delusions to the harsh reality. Too many beginner traders enter the exchanges following a viewing of Wall Street or The Wolf of Wall Street and imagine a lifestyle they wish to emulate. Jordan Belfort, really?

Having missed the chance to work in the financial markets (usually through a lack of ability and/or qualifications) some beginners imagine that sports trading will provide them with riches without the hard work. Buchdahl shows in S&S, S&S that whilst most don't make a profit, those that do, put in a lot of hard work and are unlikely to hand their edge on a plate to others. I recommend that you read the book before going any further.

Betfair unveiled streaming this year, whereby their data is pushed to client software rather than being requested. Streaming is a two-edged sword. For manual traders it is more noise and chaos with which to confound and confuse. The only traders who will make best use of streaming will be the algo-bots, able to process and act upon those millisecond updates. Algorithmic trading is the future of sports trading as it is already in financial trading.

Other news emanating from Betfair concerned the premium charge and the differing commission rates some people are paying. Cassini is handling that news more than adequately so I will leave that to him. I won't be discussing my commission rate because it is an integral part of my trading algorithms. Make of that what you will.

Cassini still shines amongst the sports trading websites. I think I'll start calling him the Teflon Don from now on as nothing will stick to him. Like myself, Cassini is never one to shy away from controversial statements but he never seems to get the flak that I get. Certainly, he doesn't get any offers of a chat from The Management for speaking out of line. Obviously, I am not as charismatic as Cassini. However, one characteristic we do share is that we never attract sycophants and fan boys. We don't need anyone to huddle around us when we are feeling a little sensitive.

I can't remember when I first discovered Trader247 but his output is worth reading. His articles are not detailed but he has mentioned to me that he may increase his content following a career change. We shall see. (keywords - pull, finger and out.) Trader247 is the kind of slow and steady algo-bot trader that I want to see more of. Some have poked fun at his small returns and don't appreciate the fact that he is consistently profitable.

If Trader247 was a quant in the financial markets, his manager would be throwing a huge bonus at him, such is Trader247's skill at picking up pennies in front of a steamroller as effectively as any high-frequency trading firm. Only the paucity of volume and market capacity prevents Trader247 from earning more. He has found his technical trading niche and I applaud him for that. I doubt his detractors make a single penny.

Advanced Cymatic Trader is still my software recommendation to those manual traders who have yet to make the jump to algo-trading. The software is as good as any other on the market and far cheaper. Created by Gavin Porter - a fellow computer scientist with a financial market background - the software gives sports traders exactly what they need. ACT was first to offer Position in Queue. Gavin leads where others follow.

For myself, the year has been a good one, with profitable algorithms developed. My new book, Betfair Trading Techniques, has proved popular. You will not find any of my strategies in the book. All I give is a solid foundation on which to research your own algorithmic trading strategies, pointing out the well-worn tracks and showing new avenues that may prove more profitable. I also provide a few tools to aid you in the search for edge.

Some manual traders and their fan boys castigate me for writing as many as 174 articles in the space of 6 years. How does an algo-trader find the time to write an article in 10 minutes, once every 12 days? Many of my detractors write many more articles in a single year and appear unable to leave off Twitter for as much as five minutes with their incessant babble. How do manual traders make any profit at all if they are glued to a screen writing guff on Twitter all day long?

This website gets more page views per day than most of its ilk so I must be doing something right. Curiously, outside of the UK the majority of my readers are from Russia and the United States, which are not countries I would immediately associate with the exchange trading of sports. Thanks to Google Translate I can read what my Russian cousins are saying. All good, I am happy to say. I have always thought that the Russians are a highly educated and intellectual people. Contact me for speaking engagements. I hear Saint Petersberg is nice.

The year 2017 will see me releasing more research. Again, no edge given, just tools for readers to do with as they please. My desire is to flood the exchanges with a new breed of algorithmic bot trader, who may have new ideas and new ways of looking at the trading problem and will take trading to the logical conclusion that I, Buchdahl and others have come to. Fuddy-duddies pushing tired old manual trading techniques can expect to be hounded again, throughout the year.

Predictions? Andy Murray to retain his number one position in the rankings and to win the French Open. With cycling's Grand Tours reducing team sizes to eight riders and Nairo Quintana still improving I think he could well win the Tour de France in 2017. And, more manual traders will turn to algorithmic trading in 2017 to avoid emotional, tired, loss-chasing, miss-timed trades and to take advantage of speed of data acquisition, processing and trading thus freeing up more time to enjoy life away from their monitor screens.

"Where could you get money that you don't give back? Let's go on with the show!"

(Ethel Merman - and in photo)

Wishing You All A Merry Christmas

I'm going away for a rest. The six months it took to write Betfair Trading Techniques have taken their toll. The short days don't help either. I am looking forward to the solstice.

Wishing you all a Merry Christmas and a Positively Edged New Year.

The Management Would Like A Word

Oh, what tangled web we weave
When first we practice to deceive!

Marmion - Walter Scott, 1808.

Today, we have access to many fine doctors who prescribe medicines that cure our illnesses. These medicines are manufactured by highly skilled pharmaceutical companies. However, our health system was not always like this.

In the past there were doctors of lesser quality, who not only cured the sick but who also produced the cure. We called these doctors quacks or snake oil salesmen. They told us that they knew what ailed us and that only they had the cure.

There was much malpractice, in those less enlightened and unregulated times. Often a quack would misdiagnose solely to sell more of the medicine they produced. They would also invent ailments and misdiagnose those too. Not only that but the medicine was often useless and sometimes harmful.

Today, sports betting and trading is no different from Victorian medicine. The web is awash with snake oil salesmen, promising us all untold wealth if only we would buy their cure. And like the cures of the past, many are sold without regulation and most are useless.

Tips are the snake oil of today, sold by charlatan tipsters. Matched betting is preached as a method for dragging the poor into prosperity. eBooks are sold by quacks from their websites rather than being reviewed and sold through independent booksellers. Trading courses are offered by untrained and unregulated ministers of supreme knowledge.

Recently, I was contacted by someone who wanted to "have a chat" with me. They wanted to put me straight, to make me understand their position. I declined. Some of what I have written went against their self-perception. Their desire to be in full control of the message on their website and on independent websites meant that I had to be put in my place.

Business is business. Vendors have product to shift and need to protect the message, the message that trading is not hard and anyone can succeed. I have just one aim on this website, to tell the truth. On this website I will tell you how hard it is to trade and that most will fail. A vendor will sell you some software and a training course with no caveats. In a zero-sum game, the majority of traders have to fail in order to compensate the lucky few who win large sums through skill or through luck.

Because my message is different there are those who feel I should be silenced. After all, who is going to buy miracle cures if the salesmen admit that most of their cures don't work and any that do only cure a few. You won't find me publishing profit and loss figures because they can be faked, they can mean revert, if I won through luck alone, and because my financial resources may be greater than yours, forcing you to take greater risks. Nor will I post videos showing you successful trades because they too can be faked. It is a simple task to make video after video until the desired effect is found.

I only publish techniques and tools, not strategies that will soon loose their edge, and do so through Amazon, where it can be independently reviewed. The risks will be emphasised to you so that you know trading is not easy. And, I will continue to point out instances where others have lied, misled or have given less than rigorous mathematical statements. A person is never as good as they say they are. They are only as good as they can be proven to be, by others.

Trader Makes Shock Discovery

A leading trader has made a shock discovery after 16 years of diligent work. The trader announced to the world this evening that the Martingale system might not be good for your wealth.

Staff at Betfair Pro Trader can confirm that the term "Martingale" has never been used before on the trader's news blog. The research paper, entitled Loss recovery systems, yet to be published in Nature, gets off to a rambling start and loses the reader in the middle but finally hits the nail on the head when the last line states "Find an edge and don’t chase. Take your losses like a man!"

Why it has taken 16 years for the trader to discuss the mathematics of trading on such a deep level is not yet known. One theory is that the trader has started to read the research of others rather than isolating himself and thought it was time he pulled his finger out. If this is the case then the trader community welcomes this recluse into open discussion.

Other ground breaking research from the trader in question includes "How to cheat at cards" and "Moving a mouse across a table in three easy lessons". Surely the Nobel committee can no longer overlook such genius.

Horse Racing - Citations

The sport of kings. Often the first sport that attracts people onto betting exchanges, horse racing offers many routes into betting and trading, with pre-race and in-play markets for both fundamental and technical traders.

Academics, in economics and finance, have long been used horse race betting markets as a proxy for financial market research. Therefore, there is a long history of research in efficient market hypothesis, money management and trading/betting strategies with regard to horse racing.

NOTE - If any links to papers are broken then just Google the paper's title to find an alternate. Papers without links might be found in Google Scholar, JSTOR or Arxiv.

Benter, William. "Computer-based horse race handicapping and wagering systems: A report." Efficiency of racetrack betting markets (1994): 183-198.

Bolton, Ruth N., and Randall G. Chapman. "Searching for positive returns at the track: A multinomial logit model for handicapping horse races." Management Science 32.8 (1986): 1040-1060.

Edelman, David. "A competitive horse-race handicapping algorithm based on analysis of covariance." The economics of gambling (2003): 106.

Edelman, David. "Adapting support vector machine methods for horserace odds prediction." Annals of Operations Research 151.1 (2007): 325-336.

Hausch, Donald B., William T. Ziemba, and Mark Rubinstein. "Efficiency of the market for racetrack betting." Management science 27.12 (1981): 1435-1452.

Lessmann, Stefan, Ming-Chien Sung, and Johnnie EV Johnson. "Identifying winners of competitive events: A SVM-based classification model for horserace prediction." European Journal of Operational Research 196.2 (2009): 569-577.

Lo, Victor SY, and John Bacon-Shone. "A comparison between two models for predicting ordering probabilities in multiple-entry competitions." The Statistician (1994): 317-327.

Rosenbloom, E. S. "A better probability model for the racetrack using Beyer speed numbers." Omega 31.5 (2003): 339-348.

Rosenqvist, Gunnar. "ARBITRAGE AT THE RACETRACK." Contributions to Mathematics, Statistics, Econometrics, and Finance: 381.

More citations will be added in due course. Check back, often.


Recently, I read an article on a vendor website attempting to explain the concept of scaling but completely failed to do so. The tenet of the article was that if you have more money then you increase your bet size, but that is not scaling, it is just correct money management. 

If you follow Kelly criterion to the letter, a successful trader always chases winnings and never chases losses. As a bankroll increases so too must trade size in relation to edge. If there is a run of losses and the bankroll decreases then so too must trade size. That is all that the befuddled Webb is saying, which has nothing to do with scalability.

The true concept of scaling is not the linear one put forward by the manual trading Webb. Of course, if you are limited to manual trading then you are limited in what you can achieve. Progressive traders should now all be looking to get into algorithmic trading and that permits true scaling of income.

In my latest book, Betfair Trading Techniques, I put forward the analogy of a shopkeeper running a 9 to 5 business. The only way the shopkeeper can scale up income in his hands-on business is to work harder or work longer. This is analagous to the manual trader trading more markets per day or trying to turnover more money in each market thus risking market capacity problems.

If the shopkeeper opens another shop and employs someone to run it then he can scale up his income without working extra hours. The shopkeeper can share the increased income with his new employee but still only work 9 to 5. The more shops the shopkeeper opens, the more income the shopkeeper earns but still his workload does not increase. More earnings with no increase in workload that is the true concept of scaling.

The same is true of algorithmic trading, with bots trading multiple markets, collecting and analysing data, taking the workload off a trader's shoulders. In financial trading the electronic revolution pushed manual traders aside. Some manual traders tried to continue as they were and failed, others tried to become algo-traders and failed (see Floored). Time moves on but always forwards. As in finance, algorithmic trading will grow to dominate sports trading. If you want to scale up your trading income then the only way to do so is through algo-trading.

Further Reading