Another Chapter Completed

I think I've settled on ten chapters for the new book. A chapter on modelling has been split into three; one on general modelling and then one each on fundamental and technical sports trading models.

A chapter on money management has just been completed with the help of Trader247 who tested something for me. The book will contain programming and spreadsheeting to put forward my philosophy of trading.

I don't think that the book will be ready until autumn. Although it is raining a lot, between the downpours the weather is amenable to tennis so I am usually at the club. On returning I am too exhausted to do anything else for the rest of the day so I watch sport rather than write. Wimbledon, the Tour de France and the Olympics will keep me busy when I am not writing during the summer.

Have four years really passed since the last Olympics? I remember taking a train from the English midlands down to London in 2012. It seemed as though everyone on the train was heading to the Olympic stadium. Every passenger was talking about the event they were going to see.

I was heading to the nearby velodrome to watch Victoria Pendleton win the Keirin and the Team GB's men win the pursuit. Watching cycle racing made me want to get back on my old road bike but I was soon off it again. Twenty years had passed since my road racing days and although I could ride, I could not attack the hills as I used to. I'd rather not ride a bike than be reminded each day of what might have been.

That is why I now play tennis rather than cycle. I was a keen watcher of tennis as a boy although I didn't mention it at school because in those tennis was regarded as a 'girl's game'. I remember one day a male teacher came into class and said, "Would anyone like to come downstairs and watch the women's final?" In those days the ladies final was on a Friday and the gentleman's final was on Saturday.

It was 1979 and Martina Navratilova was to play Chris Evert-Lloyd as she known as then. Before I could say yes the teacher added, "Of course I am asking the girls. I am sure none of the boys would want to watch it." My hand stayed down. I didn't get to see the final.

I was a big Borg fan. I still am. Nobody played tennis like he did. Walk on, win, walk off. Not a word. He did crack in the 1981 US Open final with an outburst and he was soon to retire but Borg would always be a hero for quietly getting the job done with minimal fuss.

Borg's attitude and my grandfather telling me that, "patience is a virtue" (I had to be told by him, seeing it written or said by others meant nothing to me) have guided me through life. Maybe in these more brash times, not speaking up has cost me in terms of career and life in general but at least I can say that I have not stepped on other people to carve out a life of my own.

Recently, I read Late to the Ball by Gerald Marzorati, the former editor of the New York Times Magazine who, at the age of 60, decided that he was going to learn to play tennis and be damned good at it. He didn't but as with most of us middle-aged tennis players he realised that singles is a completely different game and either you have played it all your life since you were a child or you play doubles. I can't beat people in their 70s at singles. They know all the angles. I'll stick to net poaching in doubles.

Although I don't race any more I still watch the Tour de France. I didn't during the Armstrong years. Maybe I sensed something. Today, cycle racing is as clean as any other sport. Cycle racers are probably the most tested athletes in the world. More so than tennis players and a lot more than soccer players. When I see a chiseled Christano Ronaldo I sometimes doubt if soccer players are tested at all.

I was a climber during my cycle racing days and so the mountain stages of the Tour de France will be the ones that I will be most keen to watch. Last year, I sensed a certain element on the roadside watching the race that I hope will not be there this year. Let's leave spitting and the throwing of urine to the fans of another sport. With regards to doping, I do have my doubts about Vincenzo Nibali who couldn't beat plodding Wiggo when he won the tour in 2012 and since then has become a different rider after joining the tainted Astana team.

Today is a rest day from tennis so I will get back to the book and attempt to complete another chapter. Enjoy the world of sport!

Announcing My Retirement


I awoke this morning to check my portfolio and found that my gold holding had increased by over 1 million percent. After a long and contemplative breakfast, followed by an introspective shower, I rushed like a mentalist to my computer to cash in.

However, it was a glitch (or more likely a joker on the GoldPrice website) and although my gold holding has appreciated since Thursday it has not increased to the level where I can give each and every one of you a gold bar as a parting gift. I so want to be able to do that. ;)

Back to the daily grind.

Kelly Criterion - Citations

No staking system is perfect. Some (Martingale et al.) are not even close. However, Kelly Criterion is proven to be the best way to grow your wealth. John L. Kelly was a colleague of the inventor of information theory, Claude Shannon. Kelly used information theory to show the optimal way to grow a bankroll.

The Kelly Criterion formula tells the trader the optimal bankroll percentage to risk. Percentage stakes is superior to level stakes but choose to high or too low a percentage and you will not profit as much from a winning system as you can with Kelly.

Here is a by no means complete list of Kelly Criterion citations, starting with Kelly's seminal work.

Kelly, John. "A new interpretation of information rate." IRE Transactions on Information Theory 2.3 (1956): 185-189.

Breiman, L. "Optimal gambling systems for favorable games." The Kelly Capital Growth Investment Criterion: Theory and Practice (2011): 47-60.

Chapman, S. J. "The Kelly criterion for spread bets." IMA journal of applied mathematics 72.1 (2007): 43-51.

Noon, Edmund. "Extending Kelly Staking Strategies to Peer-to-Peer Betting Exchanges." (2014).

Noon, Edmund, William J. Knottenbelt, and Daniel Kuhn. "Kelly's fractional staking updated for betting exchanges." IMA Journal of Management Mathematics 24.3 (2013): 283-299.

Noon, Edmund, and W. Knottenbelt. "Market making with an inverse Kelly strategy." 4th International Conference on Mathematics in Sport. 2013.

More articles on Kelly Criterion

Exotic Wagering - Citations

You will be familiar with the straight bet; a bet to win, place or each-way. Exotic wagering is the placing of bets on two or more selections in one or multiple events. Known as forecast betting in the UK, bets include exactas and trifectas. In the context of exchange trading, exotic wagering can also include synthetic wagering such as backing one event and laying the same event but in another market so as to create a new bet with positive edge.

Listed here are academic papers on exotic wagering.

Asch, Peter, and Richard E. Quandt. "Betting bias in ‘exotic’bets." Economics Letters 28.3 (1988): 215-219.

Bacon-Shone, J., V. S. Y. Lo, and K. Busche. "Logistic analyses for complicated bets." Statistics 24 (1992): 193-202.

Gramm, Marshall, C. Nicholas McKinney, and Douglas H. Owens. "The efficiency of exotic wagers in racetrack betting." Applied Economics 40.1 (2008): 89-97.

O'Connor, Philip F. "Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting'Exotic'Markets." Available at SSRN 951071 (2006).
Oh, Han Suk. "Exotic craps bet and a novel place bet." (2011).

Mindes, Barry. "Method and system for fixed odds exotic and straight betting with pari-mutuel rules." (2011).

Rosenbloom, E. S. "THE BEST PROBABILITY MODEL FOR THE EXACTA."

Stein, William E., and Philip J. Mizzi. "An analysis of exotic wagers in a parimutuel setting." Applied Economics 35.4 (2003): 415-421.

Thalheimer, Richard, and Mukhtar M. Ali. "Exotic betting opportunities, pricing policies and the demand for parimutuel horse race wagering." Applied Economics 27.8 (1995): 689-703.

Books for the Fundamental Horse Racing Trader

Recently, I have had enquiries from people looking for books for building fundamental trading systems for horse racing markets. As regular readers will know I am a technical trader but I do have an interest in the fundamental aspects of data and have researched the subject extensively.

My own personal view is that all public information about a runner is in the price. Any price moves are due to new public information (parade ring, horse acting up on the gallop or in the stalls etc.) or private information (to which I am not a party) entering the market. New information moves prices but not instantaneously and that is where I concentrate my efforts.

The following is a list of books that I think will be of interest to the fundamental trader in horse racing markets. I don't include any American books as there is a lot of reference to data that is not available to many traders outside of the US (in particular the UK), namely fractional times and pace data.

The Compleat Horse Player
 
The Compleat Horse Player is written by David Edelman an Australian economist. If Leighton Vaughan Williams is the British version of William Ziemba then Edelman is surely the Australian version.

Edelman covers those areas of fundamental data that he feels are relevant to strategy building but also points out those that he feels are Red Herrings, such as trainers, jockeys, track bias and dosage. The book also covers technical aspects, money management, exotics and the mechanics of a betting operation. If you are going to start anywhere then start reading the books of people with a solid mathematical knowledge.

When it comes to fundamental trading it all boils down to determining which will be the fastest horse (i.e. the first to cross the winning line) depending on conditions (distance, weight, course, weather) and the predicted pace of the race. In terms of pace, a race may have two or more potential winners but the pace of the race will determine which runner will win. The differing odds between these potential winners is a matter of the market trying to predict the pace of the race rather than the time of the race.

UK horse racing does not have fractional times nor detailed pace data so any edge you can gain in that field will put you at a big advantage.

Taking Chances: Winning with Probability

A book that is in my six books for sports traders list and one that should be in any list of books where an event involves probabilities. Taking Chances is written by Dr John Haigh from the University of Sussex the book takes the reader through the required amount of probability theory to understand the topics in the rest of the book. Topics covered include football, horse racing casino games and other game of chance where people may be tempted to back their opinion with cash. Also included is a thorough working of Kelly Criterion for both single and multiple bets. This book remains on my desk and never gets put on the shelf.



Mordin on Time

Nick Mordin has written widely on UK horse racing and is very much in the old school of form following (handicapping) and so if you are going to go down that route then you should read his books on the subject. I recommend that you read Mordin on Time as it contains a wealth of data on speed ratings derived from finishing distances. From information on lengths per second and this book you will be able to create your own speed rating for any horse.






Bioenergetics and Racehorse Ratings

Published in 2010, Bioenergetics and Racehorse Ratings had many horse racing forums chattering. Starting from human athletics through veterinary science and biomechanics, the book builds a model to rate a horse's ability. This book is an interesting read in that it attempts to come up with speed ratings using different methods to the norm. Although you will probably come up with ratings similar to the ones in Mordin's book you will do so via different route and learn a lot in the process.


If You Must Publish a Profit & Loss Blog...

I'm reading one of those profit and loss blogs at the moment. You know the type, "Look at me. Ego the size of a planet. I'm going to master sports trading football, horse racing, cricket, tennis, shinty and shove ha'penny, whilst forex trading and juggling chainsaws all at the same time."

Fine. Good for you. But please try and be consistent in your "journal". If on the first day of the month you posted a loss then your monthly tally cannot and can never be positive.

  • Figures that don't add up are an obvious hint to readers that you are not telling the truth. Maybe you made a mistake but if you cannot add up then you're in the wrong game. 
  • Dropping a strategy from your portfolio when it begins to go south so that you can quietly remove its losses from your monthly figures makes you look like a clown. 
  • Deleting pages from your blog because they contain details of previous losses is very unprofessional.

No wonder the majority of these bloggers don't post their real names. You can fool yourself but it's the people you fool into losing their money on the back of your false claims that I worry about.

Latest Model - Final Report

I completed the testing of my latest trading model on paper after being spooked by a losing streak. However, after reviewing all the data today, as Commander Data would say, "Everything is operating within normal parameters."

In the first image you can see the optimisation of the training data I used for a genetic algorithm. (Click images to enlarge). I decided upon the very first set of entries and exits because this gave a large yield with a very good Sharpe Ratio. There is a better Sharpe Ratio in the data but for far fewer trades, which creates the risk of more variance.


Looking at the data more closely I can see where I can create some new fitness metrics. Maybe something that utilises both Sharpe and absolute yield.

The equity curve for the 30, -77, 16 entry/exit vector looks rather smooth with no large drawdowns. You would expect that with a Sharpe Ratio of 5.42


I setup a bot to trade this entry/exit vector with new code to handle the new metrics that I had created. Minimum £2 trades were used so as to minimise risk whilst testing the new code under live conditions.

The sudden drop in equity spooked me and so I continued trading on paper, using the bot to collect data only rather than place any trades.


My fears were unfounded and the trades performed largely as the model expected. As can be seen in the test figures below, Sharpe and average yield were slightly higher. As the test trades were about 10% the number of optimisation trades then we can look at the previous optimisation equity curve and see similar drops if we split the curve into 10% chunks but which make no impact on overall profitability. In other words, I was spooked by the difference in scale between the charts. (A beginner's mistake. I should sit in a corner for 10 minutes.)


Also, I was confused by the bot's trade log producing figures that do not tally with what actually happened so there appears to be a bug in the bot. In the meantime the bot is not running until I am 100% sure that everything is working. I also need to get on with my new book as I have not touched it for a few months. The weather is good for tennis so I want to get some exercise rather than sitting here all day otherwise everything will be for naught.