Do Something Weird To Win A Bet

Whilst reading Wired Magazine's The Rise of the Artificially Intelligent Hedge Fund, which I discussed last month, I read two interesting statements.

The last but one paragraph of the article states,

Whatever methods are used, some question whether AI can really succeed on Wall Street. Even if one fund achieves success with AI, the risk is that others will duplicate the system and thus undermine its success. If a large portion of the market behaves in the same way, it changes the market. “I’m a bit skeptical that AI can truly figure this out,” Carlson says. “If someone finds a trick that works, not only will other funds latch on to it but other investors will pour money into. It’s really hard to envision a situation where it doesn’t just get arbitraged away.”

In a sports trading context this is equivalent to what I tell other traders about discussing strategies with others. If you share ideas then those ideas will lose their value through being arbitraged away. By that I mean any strategy that has a positive edge will see that edge lost as money, from other traders with the same idea, moves the price to where there is no edge.

Two paragraphs earlier the quote I like best was

“If everyone is using something (BPT - the same something), it’s predictions will be priced into the market,” he says. “You have to be doing something weird.”

Doing something weird is my trading motto. Too many people enter sports betting markets with old ideas; handicapping, form following, fundamental analysis, predicting results. These old ideas were fine when all you could do was place a back bet with a bookmaker.

Today, with exchanges permitting you to lay as well as back, you have the option of trading. With trading comes so many more opportunities for profiting that have nothing to do with the fundamentals of the event; who will win or lose. Instead, I trade market dynamics with no interest in who is competing or who will win the event.

This is how I find an edge in trading, by doing something that others might not think of. If I showed a trading algorithm to a fundamental trader they might say, "What has that got to do with horse racing?" That's precisely why I do it. A fundamental trader trying to determine which horse is going to win a race would never think of the things that I consider.

If fundamental traders are all picking away at speed, form and other such ratings then all they are doing is making the market more efficient in that area and removing any edge. By looking at other areas, some that may have no direct link to the sport itself, you are working in areas less looked at by others. These areas will then be less efficient and will allow you to gain an edge.

An analogy is car design. Modern cars all look similar but before the advent of Computer Aided Design (CAD) car companies were keen to make their cars look different from each other. They wanted to create a marque, something that set them apart from others. Car manufacturers knew the physics of aerodynamics but the computational complexity of calculating aerodynamic efficiency meant that the aerodynamic qualities of cars, thirty years or more ago was basic, at best. Having a car that looked different was what drove sales decades ago and not fuel efficiency.

Now, with fuel economy the watchword and computers all using the same principles of aerodynamics to design ideal aerodynamic shapes it stands to reason that cars will begin to look alike. Mathematics is a precise science, 1+1 always equals two and Pi will always be Pi. Once you have the perfect aerodynamic shape for a car then others will copy it because car designers are using the same CAD software and the same aerodynamic equations.

In algorithmic trading people are utilising computers to search for a winning trading rule. The same mathematical principles will make similar discoveries. To get an edge you either have to make the discovery before anyone else and make as much money as you can before others copy your discovery or you should make discoveries where nobody else is looking.

That is why I look to technical trading when trading horse races. Everyone is looking at a horse's form. Look at a horse racing forum and everyone is talking about the same thing. They are all looking under the same stones. My strategy is to look in areas where fewer people are looking, in areas that fewer people understand and by doing quirky things that people either never think of or discount as ridiculous.

Further Reading

Programming for Betfair is a guide to creating applications for direct access to Betfair's exchange and will therefore be useful to those wishing to implement an algorithmic trading set up using the other books listed here.

No previous programming experience is necessary to build the applications in the book. After completing the programming exercises the reader will have a powerful tool for gathering prices for database creation, strategy building and algorithmic trade placement. Beginner programmers and experienced programmers have informed me that the book is easy to understand and that it has assisted them in creating algorithmic trading platforms.