Setting Realistic Targets

Apparently, 'in X weeks I shall be retired' is the new "This time next year, Rodney..." After you have compounded your early winnings and without regard for losing streaks, ill health or other unforseen circumstances you set yourself the bold task of retiring early.

Only you won't be retiring because you intend sports trading from now until the monarch of the day sends you a congratulatory message on your 100th birthday. Trading is not a passport to an easy life, regardless of what others might have you believe. If anything you are setting out on the highway to a harder more stressful life.

Maybe because you enjoy sports trading so much you don't count it as real work but I can assure you it will be the hardest work you have ever done and probably for less income than you could have gotten elsewhere. Again that is not a problem for you because trading is the life you want to do in your "retirement". Maybe it's also because you've only had a pension fund for less than 10 years and you could do with the cash to keep you going.

I wish I could regard sports trading as not real work then I wouldn't be so exhausted at the end of the day with my eyes seeing in double vision and my back aching from sitting in this chair all day long. Betfair is no fault resistant stock exchange and my bots need a beady eye to keep them on the straight and narrow when the exchange throws a wobbly. Other traders may have simple bots trading with low stakes. My bots are precise and use larger stakes. I use them to trade multiple markets, which I couldn't do manually. I need to monitor my bots constantly and can never walk away from them.

It is good to see that one of the blog writers I read on occasions has taken a good dose of reality and changed his mind about early retirement. Of course, he can't admit that he is not as good a trader as he think he is, which is the real reason for his change of heart. His trading statistics never match his prose. Bankrolls are split up amongst systems and asset classes and quietly forgotten when they tank. A short run of success is followed by the inevitable wipe out. Honesty is the best policy because blog readers are not mugs. A hobby that pays a small income is better than a hobby that hopes to become a money spinning business but fails because of incompetence.

I have but one target, survival. The only way I am going to be a millionaire is when the last silver bullet of our increasingly corrupt financial system fails to hit its target and we go through a period of hyperinflation. I am sure the tin of beans I shall be buying with my 1 million pound note will be very tasty.

The Perfect Bet

I have just finished reading The Perfect Bet by Adam Kucharski, a history of betting in the past, present and future. The book starts with the familiar early days of probability theory, driven by Blaise Pascal and Pierre de Fermat. The theory of probability owes much to the world of gambling. Next, the book shows how brute force methods have been used by syndicates to win lotteries and that not all scratchcards are equal.

After the Second World War Monte Carlo methods were developed as a way in which to model how neutrons would behave in a hydrogen bomb. Such methods were then used to simulate millions of games of blackjack in order to find the optimal winning strategy.

The financial world is now rife with "rocket scientists" using physics to crack open the markets. One such scientist is Doyne Farmer who intially applied his knowledge to creating an edge in the casino game of roulette. Farmer then went on to use his skills to set up a fund in the financial markets.

William Benter gets a mention for his modelling of Hong Kong horse racing and making millions of dollars from his betting. Dixon and Coles and their initial work on modelling soccer games is detailed.

For those interested in bot trading there is a lot to digest. Mostly financial trading and poker playing bots are covered but there is a lot to be read between the lines. Whilst doing so I have thought of a few new approaches that I will apply to my bots. There is a lot you can learn from financial algo-trading. Much of it has nothing to do with the underlying financial instrument being traded.

Although only 200 pages long the book is very interesting and I highly recommend it.

Accounts Being Closed At Betfair

It is common to hear of accounts being closed at Betfair. Usually the reason is that premium charge traders are spreading their trades over multiple accounts so as to avoid the higher commission charge. Of course, such a practice is against Betfair's regulations and users with multiple accounts will be closed down.

Since Betfair started charging £299 for access to live data via its API I have seen a growing number of people who have had their account closed for no reason whatsoever. At least, that is what it appears to be. Some people contact me and they have categorically said that they were not multiple account users. They also said that they were not selling unofficial software to other users so that multiple instances of the software were accessing Betfair, which requires a Betfair commercial licence.

Why should Betfair close accounts for not apparent reason? And if they are will I be next? One reason for Betfair being so strict is that too many users are testing bots using the live AppKey and not using the delayed AppKey. Supposedly, that is the reason for the £299 charge for the live AppKey as a barrier to casual users taking up live bandwidth. But how you prove the difference between testing and trading is not obvious. I often run a bot for a day and perform no trades. I am merely gathering data. Is that counted as testing? Maybe some users are firing in thousands of sub £2 bets, which could be construed as testing. Especially if it is to hoover up stray pennies risk free using the round-up flaw, which Betfair does frown upon.

I should point out to users of Betfair's API-NG that the best way to test the betting side of a bot is to find a closed spread (i.e. a zero tick gap between the back and the lay) and to fire in a £2 back followed by a £2 lay (both "at the money") so that both sides of the trade are instantly matched. The loss will be minimal (just a few pennies, especially if you choose a sub 2.0 spread) and the £2 trades will keep Betfair happy.

I don't know what the future holds for Betfair users, especially users of the API. Betfair now concentrates on its bookmaking operation and with the Paddy Power link-up this can only increase. Maybe low volume API users will be frozen out and the exchange will only be for commercial use by third-party software vendors, premium charge users and independent bookmakers laying off liabilities. Who knows?

Survivorship Bias

This article has been on my hard drive for many months, waiting to be finished. I thought it was a little short until a certain blog (I will spare the blog's author from his blushes this time) dumped a load of badly researched material onto my lap. Thanks to that blog I now give you Survivorship Bias...

Here's an interesting problem. Supposedly, during the Second World War, analysis was performed on aircraft returning from their sorties. Analysts wanted to know where to place additional armour on their aircraft so as to protect aircraft crew.

The picture below displays an aircraft representing the sum of all returning aircraft. The parts of this summated aircraft in black represent areas which suffered hits from bullet and cannon rounds. The white areas suffered little to no hits. From this evidence where do you place the additional armour?

The answer is that you place additional armour in the white areas and not the areas that have suffered the most damage. The reason being that only aircraft that survived and returned to base are represented in the return data. Aircraft that were shot down did not make it home to enter the dataset.

The white areas represent the pilot's cockpit and the aircraft's rudder. If either of these two areas are hit then the aircraft won't be returning home to be entered into the analysts datasheet. A dead pilot or an aircraft that can't yaw is the worst that can happen to an aircraft and it won't be returning home to be logged.

Those of you who thought of reinforcing the wings or the engine area were caught out by survivorship bias. You only considered the data in front of you and not other data that would have been pertinent to the question.

Today we are seeing a lot of survivorship bias but in a more subtle way. For example, the "Post Brexit Racism" videos of verbal assaults and worse on foreigners in the UK. Yes, racism is not to be tolerated but I would say that these racist attacks were by racists who were racist before the referendum and would be racist if the referendum never happened. Just because these videos came about after Brexit does not mean they were caused by Brexit. If the Remain vote had won then these racist acts would still have been perpetrated and these videos would not have been given such prominence or would have been called "Sour Grapes Videos".

Also, the anti-Brexit crowd were quick to point out a downturn in the stockmarket but within a few days of the referendum the FTSE 100 had recovered. "Ah but!" shout the anti-Brexit crowd. "Look at the FTSE 250. That is more representative of trade with Europe rather than the globalised trading of the FTSE 100."

Yes, the FTSE 250 is still down but then all markets in Europe are down too as can be seen in the EuroStoxx 50 chart below. After all, Euro companies are not going to be shooting themselves in the foot by refusing to trade with one of the largest economies in the world. This same anti-Brexit crowd also point out that Sterling "appears" to be in free-fall against some currencies. And yet all currencies are constantly devaluing against each other. A far better index of currency strength is gold, which has risen against all currencies and not just Sterling.

Actually, Sterling falling against the currencies of our main trading partners is good for business as it makes our exports cheaper. At any other time a devaluation of Sterling would be looked on positively in economic terms but not at this time when it is given a different significance for political purposes.

Another attack on a weaker Sterling being good for business is to say that the UK is a net importer. This is just a smoke screen. After all, so too is the United States a net importer as can be seen in the chart below. Without exports the UK would be on its knees. The fact that the UK imports so much can be interpreted in so many ways. For example, overpopulation and the UK not living within its means or the UK has a booming export business requiring raw materials. Just blurting out "the UK is a net importer" is just scaremongering to belittle our exports.

And so, on many counts, we see data being used to prove a point that is actually an untruth. Data not being looked at in the whole and just a few elements being picked out to prove a point. Articles from left-wing newspapers and left-wing think-tanks being quoted as unbiased facts. The fact is that the financial system has not been fixed since it was revealed to have been broken in (or long before) 2008. That interest rates are still very low and will probably go even lower. Not just in the UK but throughout the world.

We have only to look at Japan to see decades where there have been deflationary periods and constant low interest rates. Brexit was an excuse to let markets find their own way (rather than banks manipulating indices as they have been shown to be) and if the suits can scare people into changing their mind about Brexit then that is just an added bonus.

Nothing has been fixed since the crisis of 2008 and there is probably more financial turmoil to come and little of it the fault of the UK. Government debt continues to rise. The world continues to live beyond its means. Bankers continually create new exotics to gamble with in their casino masquerading as a market. The markets love volatility because that increases volume and more volume means more commissions for the bankers. For a banker, a chaotic market and a controlled population can only be good.

You must understand the whole picture before using a subset of data to confirm an incorrect hypothesis. Do not start with a conclusion and then fit data to create a false hypothesis. A trader should look on volatility with a positive mind and should not be deviated from opportunities by biased data or biased thought. One person's error is another's opportunity. As Liberace once said, "I cried all the way to the bank."

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 days tennis was regarded as a 'girl's game'. Probably due to British men being at a far lower level than Virigina Wade (3 singles and 4 doubles Grand Slam titles) and Sue Barker (1 singles Grand Slam title) during the 1970s.

I remember that 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.

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