Friday, 27 July 2012

84 Wasted Days

The verdict is in. Cassini is correct - there should be no difference in approach, strategy or mindset whether the date is the 1st of the month, the 10th or the 25th.

Note the words 'should be'. As my end quote yesterday suggested, and others have mentioned in their comments or posts, in practice it is not always easy to trade optimally. The Sultan quite rightly mentioned in his lengthy post on this debate that I myself have admitted to acting in a less than optimal manner on occasion, when a poor run has seen profits taken a little sooner than they might have been had I been on a good run. Confidence can be fragile for us humans.

Nevertheless, it does surprise me that a 'professional trader' would be so negatively influenced by a date still seven days away. Over a year, this is 84 days where, by his own admission, his focus on an arbitrary date is costing him money. This amounts to 23% of the time, which to my mind is a lot of lost profits.

And there's also the question raised by BigAl of what influence an approaching month-end has in the situation where Mark is showing a loss. Marks answer is that: Normally I would become tighter and reduce risk, but would evaluate the situation individually based on the event. Seems like the same adjustment is made whether in profit or in arrears, but no adjustment should be made in either situation. And surely it goes without saying that all events are evaluated individually?

The approach should always be to keep calm and carry on. It seems to me that a change in approach, strategy, mindset twelve times a year, is a breach of the 'discipline' rule which is generally accepted as being an essential ingredient for successful trading.

But what does 'successful trading' mean? Successful is a relative term. Is success making a small profit every month, or is success maximising profitable opportunities? Mark is successful in that he consistently reports a profit, but his 'success' is somewhat diminished by his unwillingness or inability to maintain his discipline every day. In his own words "I have different gears and towards the end of month prefer to stay in 3rd or 4th rather than 5th." He is thus more comfortable recording twelve small profits and no losses than having a mix of profits and losses which total more than the twelve smaller profits. It makes no sense. Mark claims that "Aiming for growth month on month over the last 6 years has allowed me to grow, improve my key stats and become more profitable" which might be true for the first few months, but after 6 years my feeling is that confidence should be high enough to be able to weather the occasional losing month while being rewarded with larger wins overall.

This is not a disciplined approach, which one might expect from a confident trader as BigAl says, and as a full-time trader, one might expect that maximising profits would be of even more importance that to the part-time player. At some point, Mark will realise the folly of this approach, and he should be thankful that he doesn't record his profits on a weekly basis. Easing up with 7 days to go in the week would not be good!

BigAl goes on the attack with: Bloody hell, never been in more agreement with Cassini. Which I would have expected to be about as likely as Mark Iversen 'fessing up to losing on a cricket match.
I do smile when I see these guys who set themselves up and present themselves as such know-it-alls spout such crap.

I suspect he is including me as one of 'these guys' but that's his prerogative - I'm still in shock that BigAl agrees with me on something!

Scott Ferguson's take on it all is: If we all had exactly the same strategy, life and betting/gambling/trading would be very tedious. People have different mindsets. Who cares what is right and whether I/Mark/Cassini make £2 more than the next guy? If my methods and profits make me happy in my lifestyle, then the rest of the world can go twiddle their thumbs for all I care :)

The thing is that it's not a debate about who makes more - Mark is full-time, while I am not - but it's about whether or not it makes sense to have a different approach / strategy / mindset during the last week of a calendar month.

I think inexperienced traders have a tendency to obsess over short-term targets, but it's something most soon grow out of, at least if we wish to make the most of opportunities. What helped me to overcome this was maintaining moving averages - I keep 10-day, 30-day, annual and all-time moving averages and so there is no 'final lap' as Mark calls it on any date. As Matt said, the 'final lap' is when you are approaching retirement; it is not twelve times a year. It's not really the final lap when a new one begins on the 1st! 

Does the fact that Mark is full-time make a difference to his approach? It shouldn't. With six years of profits, one would expect that Mark has a large enough cushion to handle two or three successive losing months, so his decisions should be made free of the fear of losing. If this is not the case, then as I have argued previously in the full-time v part-time debate, this 'need' to make profits leads to poor decision making - taking profits too early for example, or under-staking. If Mark reaches a monthly total that covers his bills and a little extra for luxuries, then this is another example of how targets work against you.

But we are not all the same. Some of you might remember that for some bizarre reason, Mark includes share trading profits / losses in his monthly betting figures, which even Mark agreed back in March makes no sense.

Mark's comment that "Despite what you think, it works for me and I would very much recommend others adopt the same approach" is poor advice. If confidence is that fragile, then I can't argue that Mark should take the optimal approach at all times, but it's poor advice to pass on to others. There is nothing in the Kelly criterion that says "....unless the date is within seven days of month end".

Speaking of Kelly, The Golf Bettor wrote a long and excellent comment worthy of a wider audience, and I shall conclude this post with it in full (italics mine):
This debate is almost as fascinating as the Deal or No Deal conundrum. As a former odds compiler one of the highlights of the day was to scream abuse at the contestants on Deal or No Deal as one by one they succumbed to terribly poor value at the hands of the banker. Can you not calculate that you are being offered significantly less than the true value of your box we cried. How we booed when the old lady took the money early because she needed to repair her roof before the winter. There lied the conundrum, every player had a different interpretation of what a life changing amount of money was. Each player had a different opportunity cost attached to their decisions in the game. One wonders what Mr Iverson's opportunity costs are when he trades now. Does he trade in a world where confidence is of paramount importance and the opportunity cost of applying strict value principles at all times is that he risks the possibility of a nerve shattering loss? Or is he an autistic automaton able to maximize his profits or minimise his losses with perfect mathematical precision. We are not privy to the inner workings of Mark's brain and we do not know what images flash before his eyes when he is putting his family's income on the line every day. One thing is for sure is that he does not have the luxury of trading say an investments bank's money where one can become a sociopath devoid of empathy. From my experience working in the financial markets I used to hear two "pearls" of wisdom everyday: "Take your losses early and run your profits" and "No one went skint taking a profit". One requires iron discipline the other was designed to keep under performing traders sane and alleviate the pressure on them. Mark will be constantly calculating his own opportunity cost for every trade along with the mathematical probabilities and no doubt hoping they align on every trade. If at any point they don't he is presented with a choice, ram the odds down the banker's throat or pay for the new roof. What is the exchange rate of utils to hard currency, happiness versus cash. When trading does happiness matter? Does cash make you happy? We understand trading in terms of maximising profit and yet in Mark's case it is his job and jobs are part of our lives and living should be about maximising happiness. Those with full time jobs trading part time do not have the same opportunity costs as those trading for a living and yet if it is your sole revenue stream should you not maximise it? Equally fascinating is when decent punters trial Kelly staking but are unable to come to terms with the swings despite the undoubted benefits. Maybe if you are still making sufficient money to satisfy your needs/desires with level stakes betting and you are too discomforted my Kelly staking you will have to attribute a cost to that discomfort, what price Kelly? Why not use half Kelly or quarter Kelly I hear you cry. Well I have met punters over the years who have successfully made money for long periods of time and are still uncomfortable risking more on the bigger value bet and less on the smaller value bet. The debate on Kelly if indeed there is one should surround how accurately sporting outcomes can be calculated and for which sports as a consequence is it truly applicable so maybe save that for another time. Ultimately I hope Mark has attributed a value to the change in mentality of his trading at any given time and done the maths accordingly.
Incidentally, blogger appears not to allow the "/blog/blog/" when I add Mark's new link to my blog roll - possibly thinking it's an error, it automatically removes one of the /blogs resulting in the old link being entered. 


AL said...

Cass - whats the best way to implement a kelly criterion into your staking?

at the moment im kindof fluctuating alot with my stakes and think i am cutting my winning trades short because of it.

Cassini said...

Al - Full Kelly in theory, but in practice Half or Quarter Kelly or a flat 2% of your bank.

AL said...

Thanks Cass, i may look to transition onto that in the future to maximise profits.

Do you know how you can measure your "edge" so to speak?

Currently i am just making calendar monthly totals and not really looking at ROI.

I will move on to a rolling weekly, monthly total as i think thats a good way to record totals - but how do you get meaning out of these figures if say you trade maybe 3 days one week and 1 the next? thanks.