Modelling Market Efficiency With A Coin

I feel as though I am still not getting through to some people with regards to market efficiency. What can you do to convince people who possess a reality distortion field and who think they can beat games in which they have no edge? It is undeniable that in the long run the wisdom of the crowd predicts the correct probability for selections in a sports betting market.

Another problem I have is getting people to understand what "the long run" means. We can't judge the efficiency of a single betting market, any more than we can judge whether a coin is biased or not after a single toss. The markets and the coin have to be repeatedly tested.

To demonstrate what the long run is and its implications I created a simple coin tossing simulator in a spreadsheet.

The spreadsheet determines the ratio of heads to tails and then charts are created for various simulation trial lengths. The random number generator for the simulator is set up to simulate a fair coin and so we would expect the ratio of heads to tails to be even (1:1) but only in the long run.

If we look at a chart after 10 trials we see the ratio is nowhere near 1:1 (1.0 on the chart). In fact the chart looks more like 2:1, refusing to go below the 2.0 line. What can we say about the coin after 10 trials? Nothing. The same with 10 horse races. Our system might be winning after 10 races but is that down to luck or skill?

The simulation was continued for 50, 100, 500 and 1000 trials with charts displaying the heads to tails ratio. After 50 trials the chart was showing a trend towards 1:1 but could we now say the coin is fair? The actual ratio might be below the 1:1 line.

After 100 trials the chart appears to be settling above 1:1. Is the coin biased towards heads?

After 500 trials the chart is now showing a ratio for heads to tails of 1:1. The coin has reverted to the mean expected ratio. Our horse racing strategy might now be at breakeven but losing through commission payments.

And again after 1000 trials. We might be confident that the coin is fair and has regressed to the mean. However, run the simulation again and you might not get 1:1 after 1000 trials of a fair coin. I have run this simulation many times and after 1000 trials it can settle far from 1:1. I know that I have created the sim to be fair but it will take many more trials than 1000 to get consistent results. You can never be too sure about the coin.

These observations are true about sports betting markets too. With just a few races in a data set nothing can be said about the efficiency of market prices. Over hundreds of thousands of races, over many years, it is shown that prices tend towards their true value. Those who bet on horse races and who use starting prices should beware.

A bettor creating a strategy must understand that prices tend towards fair during the course of a market's lifespan. Most who think they have tamed the markets are either very lucky or haven't been trading or betting long enough for mean reversion to drag them back to breakeven (minus commission - i.e. a loss).

Most traders and bettors create systems with a limited life span and so they won't get the chance to take advantage of the long run. A losing system can have good luck or a winning system can suffer bad luck because they haven't been traded with long enough. You need an edge to have a chance of beating a market in the long run. As the simulation shows a negative edge can initially look like a positive edge and vice versa but in the long run you will mean revert if there is no edge and you will lose through commission losses.

Another way of looking at the charts above is that they are time lines towards the start of horse races. When the line reaches the 1:1 ratio the market has happened upon the long run efficient prices. Before then everything is up for grabs. You can bet on value or you can trade the mean reversion. But what if you don't know if the coin is fair or not. What then? Maybe the coin is biased 2:1 in favour of heads but you don't know that it is.

This is the main reason why I do not waste my time studying form and betting on fundamentals. I much prefer technical trading, working with mean reversion rather than against and preying upon other traders who get caught up in an exuberant market. I don't know what a price should be, I only know that when a race is about to start, prices will be fair in the long run but until the race starts there is the opportunity to take advantage of the indecision of the crowd until wisdom takes over.

There are some good fundamental traders who can determine the optimal time to bet. Usually they have access to private data and the odds are against you being such a person.

I Can't Do It When You're Watching Me!

A curious post "Luck and Skill in Trading..." from Peter Webb on his vendor blog who says, "Of course, you can’t guarantee that you get it right and also talking and trading is pretty hard. When trading you need no distractions to be able to trade effectively. A room full of people is a major distraction!" 

I wonder how traders in financial markets manage to trade sitting next to each other in huge trading rooms with all the noise, hustle and bustle, let alone the former open outcry traders pushing and shoving in their trading pits? Come bonus time and a trader doesn't get any extra for his year's work can he say to his manager, "I would have made more but everyone was looking at me!"

[EDIT: Two can play at this game. Financial traders have noisy squawk boxes, television screens and other traders shouting orders into phones whilst they themselves trade. 14 winning trades in a row is nothing if you have been trading for a long time. I have tossed a coin and gotten 14 heads in a row but that doesn't make me a genius tosser. Just a tosser!]

Jospeh Buchdahl discusses luck and skill in his excellent book Squares & Sharps, Suckers & Sharks and, as usual, he backs his statements up with facts and figures rather than anecdotes. What Joseph more than amply demonstrates is that at the top of the game, be it in sport or gambling on sport, is that as the skill gap closes the luck factor increases. 

Soccer has always been a little backward in going forward, which you can read about in Soccernomics. Sport science and big data has only recently entered the realm of that sport. Putting aside Leicester's outlier in the 2015/16 season (Leicester has since mean reverted) the vast sums of television money that now buys players and support staff means a bunching up at the top of the Premier League by those teams owned by the super-rich. There could well be a lucky moment or two this season that decides who takes the league title.

In trading too, with all the available data and the technological improvements to process that data it gets harder every year to find an edge. The future will probably see markets predominantly filled with algo-traders and high-frequency operations, less of the old-school manual traders "scalping" a tick or two. As with pit traders in finance, the manual trader in sports will become marginalised. Reactions to late-breaking information will be more rapid than today and as in the Premier League it will be the wealthy operations with the latest technology that truly profit.

Another snippet from Mr Webb's post mentions, "If you assume that my ability to get a winning trade is just that of a coin toss, a 50-50 chance, then what is the chance of me getting all 14 traits (trades) correct?" I can't help but think that the little imp has been reading my website again and suffering from a little cognitive bias in jumping to a conclusion that isn't there.

I did say in my article Scalping and The Winning Combination that in a directionless market a (noise) trader has only a 50% chance of success. If a market has direction then the chance of trading market movements is no longer 50/50 but then I did say, "If they had asked, 'In an upwardly trending market.' then I might have said something different."

Betting Market Efficiency - Citations

Discussing betting market efficiency is guaranteed to start arguments. Some believe that betting markets are efficient whilst some believe there are inefficiencies in betting markets. The truth is that both beliefs are correct.

Betting markets are efficient at aggregating information into prices but not in zero time. Starting prices for horse races are long-term efficient (over many races prices represent the true chances of a horse winning) but when a betting market opens the prices are rarely at their starting prices. 

Early prices are at best a guess, many hours before the race start. New information flows into the betting market by way of the wisdom of the crowd and their betting intentions. As the number of bets increases, the market's prediction becomes ever more accurate (by way of publicly available data, late breaking information, non-runners, private information, observations from the parade ring and during the canter to the start etc.) until the start of the race when all public and private information has been aggregated into the starting price.

Because betting markets take time to aggregate information, fleeting ineffciencies occur and a trader has to take advantage before the rest of the market participants arbitrage out that inefficiency.

There now follows a list of citations for academic research on betting market efficiency. Papers with links can be downloaded from here. Pages without links might be found by those with JSTOR accounts.

Asch, Peter, Burton G. Malkiel, and Richard E. Quandt. "Market efficiency in racetrack betting." Journal of Business (1984): 165-175.

Bird, Ron, and Michael McCrae. "Tests of the efficiency of racetrack betting using bookmaker odds." Management Science 33.12 (1987): 1552-1562.

Corral R, Leonardo. "Testing market efficiency in a controlled environment: the case of parimutuel gambling." (1992).

Dolbear Jr, F. Trenery. "Is racetrack betting on exactas efficient?." Economica (1993): 105-111.

Figlewski, Stephen. "Subjective information and market efficiency in a betting market." The Journal of Political Economy (1979): 75-88.

Forrest, David, and Robert Simmons. "Globalisation and efficiency in the fixed-odds soccer betting market." Centre for the Study of Gambling and Commercial Gaming, University of Salford (2001).

Gabriel, Paul E., and James R. Marsden. "An examination of market efficiency in British racetrack betting." Journal of Political Economy (1990): 874-885.

Golec, Joseph, and Maurry Tamarkin. "The degree of inefficiency in the football betting market: Statistical tests." Journal of Financial Economics 30.2 (1991): 311-323.

Gramm, Marshall, and Douglas H. Owens. "Inefficiencies In Parimutuel Betting Markets Across Wagering Pools In The Simulcast Era."

Hausch, D. B., Lo, V.S.Y. & Ziemba, W.T. (1994) Efficiency of Racetrack Betting Markets, San Diego, London: Academic Press.

Hausch, D.B. & Ziemba, W.T. (1985) Transactions Costs, Extent of Inefficiencies, Entries and Multiple Wagers in a Racetrack Betting Model. Management Science, 31-4, pp. 381-394.
 

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

Johnson, Johnnie EV, Owen Jones, and Leilei Tang. "Exploring decision makers' use of price information in a speculative market." Management Science 52.6 (2006): 897-908.

Smith, Michael A., David Paton, and Leighton Vaughan Williams. "Market Efficiency in Person‐to‐Person Betting." Economica 73.292 (2006): 673-689.

Snyder, Wayne W. "Horse racing: Testing the efficient markets model." The Journal of finance 33.4 (1978): 1109-1118.

Sung, Ming-Chien, Johnnie EV Johnson, and Alistair C. Bruce. "Searching for semi-strong form inefficiency in the UK racetrack betting market." Information Efficiency in Financial and Betting Markets (Cambridge: Cambridge University Press, 2005) pp (2005): 179-192.

Twomey, Paul. Market efficiency of horse-race betting markets with applications to spread betting. Diss. University of Sussex, 2005.

Vlastakis, Nikolaos, George Dotsis, and Raphael N. Markellos. "How efficient is the European football betting market? Evidence from arbitrage and trading strategies." Journal of Forecasting 28.5 (2009): 426-444.

Williams, Leighton Vaughan. "Can forecasters forecast successfully? Evidence from UK betting markets." Journal of Forecasting 19.6 (2000): 505-513.

Williams, Leighton Vaughan. "Information efficiency in betting markets: A survey." Bulletin of Economic Research 51.1 (1999): 1-39.

Williams, Leighton Vaughan, and David Paton. "Does information efficiency require a perception of information inefficiency?." Applied Economics Letters 4.10 (1997): 615-617.

(This page will be updated in due course.)

Errors of Judgement

Here's an interesting video from BetAngel about being open minded. I agree with the video's sentiment in that I too leave no stone unturned in the pursuit of edge. If I see something mentioned in a forum or on a website that is too good to be true then I don't move on to the next page, I investigate. I have plenty of data of my own but if someone's idea uses data that I do not have then I can easily task one of my price bots to gather the data I need to test validity.

Most of my ideas and yours too come to nothing, which is just the way things are in trading. More often than not we dicover how beautifully efficient markets are. Now, efficiency is an emotive word in trading. The problem is that for many people it is such a rigid definition. Mention "market efficiency" to some and you will hear a chorus of "No they are not!" especially in social media group think.

When I say "market efficiency" I do not say, "Markets gather all available information in zero time and a price in a market is the price it should be therefore betting and trading on sports is not profitable." After all, I do trade on sports markets so obviously that is not my definition of market efficiency.

What I do say is that prices are long-term efficient. All horses starting a race at evens (decimal 2.0 - probability 0.5) will win about half their races. What I never say is that a horse whose odds are 2.0 at the opening of a new market will win 50% of their races. At the beginning of a market's life span there is little or no information in that horse's price and those odds of 2.0 could be 1.80 or 1000.

The Wisdom of the Crowd is another marvel of market activity. Ask one person what the odds on a horse should be and probably they will be wrong. Ask ten people and they could all give different answers. But ask thousands of people through their betting activity and just before the off, when all public and private information has been teased out of those bettors with something to say about that market, the starting prices will be long-term efficient.

It's what happpens between market open and the start of an event that makes trading possible. Now, I am not a fundamental trader as far as the old-school pre-exchange definition is concerned. I trade market over-reactions, trader naivity, market dynamics and psychology, and various forms of arbitrage. I have created my own metrics for determining when to trade, all are tested for edge otherwise I wouldn't implement such strategies in my bots.

Obviously, there are inefficiencies in markets but markets are efficient at gathering public and private information and reflecting it in a price, only not instantaneously. Only when all public and private information is reflected in a price is that price efficient. Before all information has been reflected in the price then that price is open to speculation, both as to its validity and its trading potential.

So, to make things clear, markets are long-term efficient but there are various informational and technical reasons as to why prices do not immediately reflect their true price until a market closes before the event begins. The majority of us are not privy to private information, public information does not take future news into account (e.g. a horse that will act up in the parade ring, later in the day), beginner traders (especially the scalper variety) add noise that arbitrageurs can trade on, and there are many more reasons besides.

There are lots of ineffciencies that can be traded on but at the same time the market is efficiently gathering information through the wisdom of the crowd. To me that is not a contradictory remark, it is a fact.

Further Reading

Squares & Sharps, Suckers & Sharks: The Science, Psychology & Philosophy of Gambling contains a lot of excellent research on market psychology and efficiency. No trader should trade before reading it.

The Cassini Division

The US presidential election reminds me of Monty Python's Upper Class Twit of the Year, leaving Americans with the unenviable task of choosing the best from a bunch of idiots.

Hillary Clinton wanting the job so badly should immediately preclude her from the job, as Billy Connolly might say. Trump seems never to have wanted the job in the first place and is doing his best to lose. Gary Johnson of the Libertarian Party appears mentally unstable with a whole portfolio of video oddities. I don't know anything about the US Green Party, I just naturally assume it's full of loonies like the UK version. Maybe the ballot papers should have another option: "No President for the Next Four Years". The electorate might get to like that and will be chanting "Four more years!" in 2020.

A rather nondescript fellow, going by the name of Cassini, has talked (and talked ad nauseum) the value out of a Clinton victory in next month's US presidential election. Given Cassini's track record with politics and economics (poor) it might be wise to see if there is any value remaining in Trump, although the candidate is doing his best to negate it.

Ahead of last June's Brexit vote, Cassini was certain of the Remoaners Remainers gaining victory but for some inexplicable reason he didn't bet his house on it.  Maybe his private wire (a la Kelly Criterion) was faulty in respect of that dead cert. Fortunately, the infinite wisdom of the crowd prevailed at the prospect of the UK luring businesses from around the world with a corporate tax policy free of the shackles of the EU.

Before the first Brexit votes had been counted, the betting and financial markets had priced in the short-sighted view of the Establishment, for whom change and revolution are to be avoided. It's odd that lefty radicals in their dotage would hitch themselves to that wagon but this is not a political website so we won't go down that cul-de-sac.

A wise move would have been to buy a fall in Sterling and wait for the Sunderland vote, the first to be announced. Sunderland was very much a barometer for the rest of the country and was widely expected to vote for remaining. If the vote was to remain then there wouldn't have been much more upside in Sterling as the markets had been rising for a couple of days in anticipation of such a result. A bet for Sterling to fall could have been closed out for a small loss in that case. However, a vote to leave would be a different matter, as has been proven. 

British exporters can't believe their luck with the falling value of Sterling and when Ireland (a country sick and tired of being told how to run its taxation policy by the EU) sees the UK luring multinationals away from the Emerald Isle then Ireland will consider abandoning the sinking SS Merkel too. By SS I obviously mean Steam Ship. Honest.

With Clinton regarded as Wall Street's man (sic) because her husband never had his trousers on long enough whilst in the White House, it might be prudent to bet on a fall in the dollar or the S&P 500 rather than laying Hillary (excuse me whilst I heave). Even a hedge trade on a Clinton win and a dollar/index fall for the bonus arbitrageurs might at best win the bonus or better, a handsome slice of profit. I am sure hedge funds everywhere are doing just this, as they did prior to the Brexit vote.

Scalping and The Winning Combination

I had an interesting conversation with someone about scalping. By now most readers will know what I think about scalping and would rather stick a knife in the side of their heads than hear me repeat myself.

Part of the discussion centred around a trade that tries to take advantage of a volatile market that has no particular direction. The discussion led to combinatorics (the calculation of combinations), profit and loss stops, and trend trading.

Their argument was as follows

With regards to scalping being 50/50, let's say 10 minutes before the off I offer £10 at 6.0 and my offer gets accepted, and I place a back order at 6.2. Would you agree with me that there is a greater than 50% chance of my trade being completed successfully before the off if I don't have a stop loss in place.

Intuitively, I knew this to be 50/50. My answer was

If you put in a random lay at 6.0 and a back (at) 6.2 then in the long run 50% of the backs will be taken and with no stop loss you will lose money. If people are backing at 6.0 and taking your lay then I would think there is a slightly greater chance of the market going down than up. You are hoping for market volatility and that the spread marches up and down the ladder. The chances of that are again 50/50.

If they had asked, "In an upwardly trending market." Then I might have said something different. However, because I thought the question was about a volatile market then my answer is correct.

A further email was received

The market's possible next 4 up/down movements are as follows:

DDDD

DDUU

DDUD

DDDU

UUUU

UUDU

UUUD

UUDD

UDDD

UDUD

UDUU

UDDU

The first 4 scenarios result in my trade failing (assuming that I'm not matched fully when the market is at 6.0 - 6.2). The latter 8 scenarios are ones where my back order would be taken out. Does that not suggest that, if the market decides to go on a random walk, I'm far more likely to have a successful trade than not?

Do you see the error? How many combinations should there be? I make it 2^4 (2 directions to the power of 4 successive time periods) but I only see 12, which is why the questioner thought that they had a greater chance of the market being up after 4 moves. Here is the full list of combinations with statistics that will be explained later.

DDDD - 5.4, 5.3, 5.2, 5.1 - lose 8 (-1)
UDDD - 5.6 - win 1 (+1)
DUDD - 5.4, 5.5, 5.4, 5.3 - lose 4 (-1)
DDUD - 5.4, 5.3, 5.4, 5.3 - lose 4 (-1)
DDDU - 5.4, 5.3, 5.2, 5.3 - lose 6 (-1)
UUDD - 5.6 - win 1 (+1)
DUUD - 5.4, 5.5, 5.6 - win 1 (-1)
DDUU - 5.4, 5.3, 5.4, 5.5 - scratch (-1)
UDDU - 5.6 - win 1 (+1)
DUDU - 5.4, 5.5, 5.4, 5.5 - scratch (-1)
UDUD - 5.6 - win 1 (+1)
DUUU - 5.4, 5.5, 5.6 - win 1 (-1)
UDUU - 5.6 - win 1 (+1)
UUDU - 5.6 - win 1 (+1)
UUUD - 5.6 - win 1 (+1)
UUUU - 5.6 - win 1 (+1)

The questioner also assumed that each move would be equal (i.e. 1 tick) so I have additionally marked the combinations with the consequences of 1-tick profit taking and no stop. We also assume that the trader offered 5.5 and was taken and then offered to back at 5.6 rather than taking prices on the other side of the spread.

As we can see the trader had 10 wins of 1 tick but lost 22 ticks without the stop. If there had been a stop (let's say 1 tick) then the result in parenthesis would have been the outcome and we have the 50/50 that I expected; 8 ticks of profit cancelled out by 8 ticks of losses. The mathematics of probabilitity must be fully understood otherwise some serious mistakes can be made.

If you are thinking of scalping (and I don't recommend it) then you must understand that in a volatile market you will lose money (break even minus commission or worse if you are manually trading). In a trending market you shouldn't be tick scalping at all but trading the trend for multiple ticks. Feel free to print this article out and take it to one of those useless trading courses you are about to waste your money on.

How to Read a Sports Trading Website

Any trader with a good research strategy will look at the websites of other traders for ideas. However, beginner traders may not realise that a lot of what they are reading is utter rubbish. I often get requests from traders asking me to check out a website because they want to know if they can believe their eyes.

Everyone has the right to discuss their trading activities online and everyone has the right to do with their money as they please, including losing it. Problems arise when someone who does not want to lose their money does so after copying the actions of a trader who is either incompetent or a charlatan. Personally, I never read (and would never write) a profit and loss blog by choice. There is far more important literature to be read. I only read profit and loss blogs when they are pointed out to me by others. 

When you are reading a profit and loss blog you are most likely reading the exploits of those who got lucky and who will either soon regress to the mean (zero profit) or who will crash and burn through poor money management because they became frustrated at not winning enough. That is a simple statistical fact and if you don't understand why that is the case then think again before becoming a sports trader. (Some clues - read about survivorship bias or better still Joseph Buchdahl's Squares & Sharps, Suckers & Sharks).

Here are some tips for when reading trading websites.

Living the Life

What life? All sports traders that I have met and who are comfortable in life do so because of other income streams in addition to sports trading. Sports traders whose sole income is trading and who trade alone are unlikely to be very wealthy due to the inability to scale up their income, something that is easy for a syndicate. Only the higher-ups in syndicates will be "living the life", usually off the backs of others. William Benter is a very successful and wealthy player on the Hong Kong horse racing scene. You can be sure that the people working the Pari Mutuel machines on his behalf are not wealthy at all.

Be wary of anyone selling tips, trading knowledge or software that is backed up with photographs of swimming pools, beaches, fast cars or piles of cash. They are playing on your desires for a better life. This is a rule that can be applied to anyone selling you anything, be it pensions, life and medical insurance etc. The sunny beach photo is to tug at your wish for a comfortable retirement. Giving your money to charlatans displaying pool side photos will guarantee an unpleasant retirement.

 

Outrageous Claims

The classic "I am the CEO of a multi-billion dollar global organisation" seen on one infamous blog can only be met with "Then why on Earth are you wasting your time with sports trading?" Wikipedia defines a CEO as "the position of the most senior corporate officer, executive, or administrator in charge of managing an organisation". The CEO of such a global organisation would have an eye watering salary such that his wasting time on sports trading makes no sense. More so when the CEO claims they are going to throw in their career for sports trading. The claimant is either mad because their income will drop by more than 99% or a fantasist because they never thought through their fictitious claim.

If the aforementioned person really is a CEO then I can only assume his trophy wife is on the phone to a divorce lawyer or worse, a hitman. The CEO in question makes himself look even more of a buffoon when he refers to his career as a "job" and that he has just "returned home to cut the grass" rather than ordering someone to cut the south lawn of his mansion.

You must always read between the lines whenever you are reading a profit and loss blog. Is what you are reading credible? If one thing stands out as ridiculous then the whole website is probably equally so.

The Master Juggler

You will have heard of the phrase "a jack of all trades and master of none". Most sports traders concentrate on a single sport, the one they know most about or the one they believe they can profit from the most. After all, why bother trading on more than one sport when you know you can profit most on just the one?

Spreading your risk over multiple sports is no excuse when the are so many events for a single sport. More than enough to spread your risk over. The only reason why you might trade multiple sports is when one sport is in close season and another is open such as with soccer and cricket. That is not necessary when trading horse races all year round. Even syndicates with many operatives will concentrate on just the one sport. 

If you read about someone trading multiple sports and financial markets then either they are making it all up or they are in line for a fall because they are not giving enough attention to what they are doing.

Silence is Not Golden

Watch out for trading strategies that are no longer reported on. If no good reason has been given for the omission then the only logical reason is that the strategy has turned south and is now losing money. The author is too embarrassed to mention it as that would be damaging to their ego and self-image of a successful trader.

Look out too for manipulated bankrolls which have been altered to hide a losing strategy or bad money management. Bankroll reporting may also be dropped to cover tracks. You must look through the history of the blog and calculate the rise and fall of the bankroll so that discrepancies can be noted. If figures don't add up then the blog doesn't add up either.

The Missing Page

Pages deleted from a blog often denote that the narrative has now changed, the deleted page will contradict that new narrative. A useful tool in this respect is the Wayback Machine, a website that archives not all pages from around the web but a selection that have been deleted in the past.

Currently, there are over 500 billion pages stored on the Wayback Machine so there is a good chance that deleted pages of a profit and loss blog will exist. Just type in the URL for the website you are interested in and you might find some earlier pages that have been deleted

Target Setting

Those who set themselves targets of earning X amount in so many months or retiring on a certain date are very much novices and not to be copied. Who knows how long a strategy will last. Can it be depended upon to continue yielding profit? A strategy will eventually lose its edge as others discover it. Depending on a strategy far into the future is folly.

Setting a target of so many percent per month at the beginning is also ridiculous, especially when the percentage is very high. When most successful traders claim one or two percent on turnover then anything far higher is not to be trusted. Simply, such a strategy would be arbitraged out very rapidly as there would be something obviously mispriced in such a market.

A lot of beginners report on their paper traded strategies as though they were live. If the strategy works at all then slippage will certainly bring the optimistic yield to a more realistic one.

Cognitive Bias

The first thing a scientist is taught is the scientific method, which is defined as "the systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses." What that mouthful means is that through observation you make an hypothesis (i.e. an educated guess) as to how something works. Then, through experimentation and testing, you attempt to falsify that hypothesis.

Falsification of an hypothesis means that the theory was incorrect and should be discarded. Failure to falsify means that the theory is not incorrect but never true. Yes, no scientific can be proven true, just falsified. All scientific theories are best guesses as to the truth but at least they are a lot better than blind faith.

Trading bloggers who are not scientific in their approach often start with a conclusion rather than an hypothesis and then look for data to satisfy rather than falsify the conclusion they have already made. I could name (but I won't so don't ask) some very well known blogs that utilise cognitive bias and look for data to prove something whilst ignoring data to the contrary.

Readers of trading websites catch themselves with survivorship bias if they believe that all the websites they read represent the whole truth. Nobody would write a website about being a failure and there are successful traders who don't have websites. Excluding those and other websites from your mind means that you do not have the full picture.

The biggest cognitive bias in trading is the belief that trading is easy and everyone wins, and then only looking for websites that confirm that false statement whilst ignoring those that do not.

Tipsters

There is so much scope here for scams that once again I recommend that you read Squares & Sharps, Suckers & Sharks. Amateur tipsters are just that, amateurs. They regress to the mean time and time again with no long-term success. People who charge for their tips are, more often than not, scammers or they have deluded themselves with survivorship bias.

A single year does not a successful tipster make. There needs to be many years of profitable tipping to be statistically significant. Most tipsters don't make it past the first year after the sudden realisation that they have no idea what they are doing.

Do not trust any tipster that has not been independently audited. Reviews on a tipster's website won't do and nor will tipster aggregation websites (most of which are suspect) where tispters compete against each other. Instead, only trust reviews from independent reviewers who have no stake in any tipster, are not selective in who they review, who display reviews for all tipsters (win or lose), who are not tipsters themselves and who make no profit from their reviews.

Personally, I never use any tipsters. After all, the vast majority of tipsters only have access to public information, which is already reflected in the price. A successful tipster needs access to private information or difficult to access public information. Such tipsters are very few and hard to find making the exercise of finding one not worth the bother. The reality is that the vast majority of tipsters are a complete and utter waste of bandwidth.

eBooks Not Available on Amazon

You will have seen advertisements for eBooks and sometimes physical books that will teach you how to "get rich from sports trading". Often these books can only be bought direct from the author and are not independently reviewed. Don't trust any reviews on the author's website. Look for independent reviews on a website that you can trust, such as Amazon, and where the review is flagged as being a "Verified Purchase".

Without the "Verified Purchase" mark there is no proof that the reviewer read the book.

Also, look at the sales rank for the book and compare it with other related books. A book in the top 20 is there for a reason. If a book is well down on sales rank but has a lot of glowing reviews from unverified customers then there is the possibility that the reviews were written either by the author or someone they know.

eBooks sold direct by the author and without review are almost guaranteed to either be scams or to have little to no worthy content. I challenge the authors of these books to send me a copy whereupon I will give them an unbiased review and a free link to their book from this site.

After all, if your book is any good then you will want to have it in the largest bookshop on the planet. Why restrict yourself to your own little viewed website? I once asked the author of such an ebook why he didn't sell his book on Amazon. He said, "Amazon don't sell gambling books". Really? I see plenty of gambling books on Amazon but who wants to gamble, I thought your eBook is teaching people how to trade.

Remember, if you buy a PDF file through PayPal via the author's website then there is no recourse for a refund, which is precisely why these authors only publish electronically. Only buying a book through Amazon or other bookshop can you get a refund, if you are not happy with your purchase, which you probably won't be. Most PDF sellers scrape free content off the web, sell it on and want to avoid giving refunds to irate customers.

Forums

This is a tricky area as some are good and some are bad. I find the ones that are trying to sell you something or who are run by a known figure can sometimes be troublesome. With nothing to sell and no ego to be massaged an open forum is a great place to learn about trading from others so long as you apply the rules of this article to everything you read.

Some forums are run by well-known people who have built a following for themselves and if any attempt is made at questioning them then like a pack of wolves the rest of the forum will descend upon you. Not because you are wrong but because of a curious herding instinct amongst the other forum users. It's like being at school again and crossing the path of a gang member.

I have been the victim of this herd instinct by disagreeing with what a forum owner had said. To then have abuse hurled at me on the forum and on my own website demonstrated a lack of rationality. The other forum users had nothing to gain other than the comfort of being in a small clique where knowledge could not be trusted to be correct. Knowledge comes from open discussion. Preventing open discussion and punishing people who disagree with you leads to falsehoods becoming facts.

Vendor Websites

Obviously, a vendor is out to profit from the products sold on their website. If they also have a forum or blog then they will probably censor commenters who might impact on sales. Therefore it is not possible to get an unbiased view from a vendor website.

A vendor might blog about the good points about their product but never talk about any bad points that will be discussed elsewhere. Seek independent reviews.

Concluding Remarks

Always be wary and question everything you read. This is your money that you are risking and you should be as careful with it as you would be when buying a house, a car, insurance or a financial investment.

• Verify everything you read by confirming it elsewhere. 

• Don't be a victim of cognitive biases.

• If it is too good to be true then it is.

• Don't buy any PDFs or video packs from the author's website. Only buy from independently reviewed sources.

• Use the Wayback Machine to look for embarrassing cover-ups.