Tuesday 25 November 2008

My Correct Opinion Is Worthless

I recently added Juice Storm to my list of blogs to follow, and a recent post was titled "3 Simple Rules of Winning Traders". The number 2 rule was this:

Rule 2 - Let Price Confirm Your Thesis

To politely paraphrase a very crude Wall Street saying, opinions are like faces - everyone has one. Developing an opinion, even one that is ultimately correct, is utterly worthless if the market happens to disagree with your assessment. The history of trading is littered with brilliant analysts who were absolutely correct on their calls and yet were bankrupted by the vagaries of price action before they were ever proven right. Your opinion may be dead on, but as traders it is price movement, not opinion that we are trading. Until and unless price corroborates your opinion you have no entry signal for your trade.

Now it seems to me that this rule was taken from a stock-trading manual for momentum traders. For sports betting, is it really true that "even if your opinion is correct, that it is utterly worthless if the market happens to disagree with your assessment"? I don't think so. Maybe for momentum traders, but for value traders like myself...?

When I watch games, I am constantly forming opinions, and acting on them if the price looks value, i.e. if I think the price will move in my favour at some point. If my opinion is correct, then the result will confirm this, and usually within a couple of hours. It's not like the stock exchange where the game never ends (well, maybe in takeovers or bankruptcies, but you know what I mean).

In my ideal world, every trade would immediately move in my favour, and keep moving in my favour until the end of the game, but I live in the real world, and more often than I would like, the price moves away from me which means I am faced with the decision to trade out for a loss, or hold my position and wait for the price to come back.

I guess if I was a pure momentum trader, then I would immediately take the loss, and wait for another opportunity, but since my style is to watch the game, form opinions (often flip-flopping many times during a game) the whole idea is for me to find value by disagreeing with the market.

If the market moves against me, and my opinion is still that my selection is value, then I will add to my position, or at least hold. I only take large positions in markets that I have watched for three or four years, and I no longer panic if the market takes a different view to mine.

Of course, sometimes I do go on to change my opinion, and take a loss, but more often than not (or I wouldn't still be doing this), my opinion is vindicated, and I can update my spreadsheet with another win.


Man of Mystery said...

I take your point. But for me I like to see the price of a horse moving towards the price I feel it should be before I’ll enter a trade based on it continuing in that direction. Often I’ll be wrong though.

If I go against the momentum simply because of my opinion of value then I will not be comfortable. No matter how much I value my opinion.

I’m sure you know that many losing punters looking for value use flawed logic betting favourites. Because favourites win about 30% of races these punters think that by backing favourites which are at better percentage odds than 30% they will show a profit. So they back favourites at better odds. All that happens is the winning strike rate of these favourites adjusts downwards so backing these favourites still loses money. But they’ve had great value so it makes it worthwhile?

Another aspect of value and its uncertainty is from bookies who are just guessers IMO, they price up from the tissue and copy the guy in the next pitch. Try to get decent money on and you will be wasting your time. Value is a myth. The “professionals” won’t even stand by it. In case they’re wrong.

However, the most successful betting exchange traders are usually very opinionated and yes, many would trade in the way that you describe. Would they be more successful if they didn’t? We’ll never know. They’ll never change.

Your “… style is to watch the game, form opinions (often flip-flopping many times during a game)” and “…to find value by disagreeing with the market.” Sir, you have a gift. Few share it. And good luck in your search for value. It works for you and so I can’t knock it - for you. But going against any market and basing any trade on your opinion when the market doesn’t share it could be a recipe for disaster.

Graeme Dand said...


I'm so strongly agreeing with you here mate my head is exploding!

MOM, to quote "Value is a myth" is one of the stupidest things I've come across in my time reading blogs.

I don’t expect you to have read much of my blog this year but it has been based mainly on trading horse-racing using my knowledge and not on price movements. I admit this isn’t the standard way to trade but I’ve shown it to be fairly successful considering my bank size.

“Bookies are just guessers” is the sort of quote I would expect from someone who hasn’t placed a bet in their life and not from someone with your experience. If bookies were ‘just guessers’, how would they make a profit in the game? (even allowing for the over-round). By your game theory method, it’s not in the interests to price up a race first since you will be copied by the guy on the next pitch to you. Lots of bookmakers do their own tissue nowadays and are you saying the tissue makers are guessers too?

Your example re. backing favourites is based on the punter having an IQ of 10. It’s certainly true that between me, you and Cassini, we probably have a decent IQ average but you can’t assume that all punters in this day and age are stupid. I don’t think people back favourites greater than 2/1 just because 30% of favourites win. That’s embarrassing to think that any of these punters are walking the planet nowadays.

We now live at a time when the average punter is much smarter than in the past and that’s partly why Betfair and sites like Oddschecker have grown so fast. Gone are the days when a punter takes any price available to him. Punters seek value everyday now and to say value doesn’t exist is just rubbish.

Lastly, your quote about basing a trade on an opinion when the market doesn’t share it with you is the worst quote I’ve read all year. Seriously. Utter rubbish.

If a horse should be 10/1 in your opinion and the market thinks it’s a 20/1 chance, how can this be bad? Obviously, trying to trade it is difficult but if you are right about it, then you should be able to trade IR. I agree scalpers maybe can’t do this as the stakes are too high but if people can’t exploit inefficiencies in betting markets, they shouldn’t really be trading in my opinion.

If a horse is drifting and getting a bigger price and you think it should be shorter, by backing it and laying IR, you are exploiting the value to the full.

Sorry for the rant MOM and Cassini but the market isn’t always right on Betfair. If it was, we wouldn’t be trying to trade it. I’ve read so much nonsense this year about how you can’t beat Betfair as the market is so efficient and the fact that drifters don’t win and it’s rubbish. That’s the biggest myth out there.

Great reply Cassini. If I was still blogging as regularly as you mate, I’d be well up for a debate on this. We’ll have it on your blog instead! :)


Anonymous said...

Gentlemen, forgive me for being blatantly arrogant for a moment here but its time for a little balance & perspective! Both MOM & Cassini are actually correct - because they are coming from slightly different perspectives.

Firstly MOM, your view of the bettors value approach and apparent understanding of how "punters" approach it is very flawed, full of holes & false assumptions. Much how GD has described above (Ive never come across a losing punter who backs Favs over 2/1 just because 30% of them win for example.)

However, it appears Cassini (sorry mate!) has unfairly extracted a rule for "Cold trading" (trading on market/price fluctuations derrived mainly from supply & demand principles) and applied it to in-play sports betting.

In this setting, the "In play" trader is anticipating the future movements & swings of the underlying event. The "Cold Trader" is actually anticpating the markets change in view of the underlying event before it starts.

This is where rule 2 becomes important for the cold trader. The rule is there to help cold traders with their entry points. [i]With this approach[i], even if your opinion of the value is there, it won't often payoff to go against the market, even if it is wrong (unless your entry point is based on contrary/swing principles.)

In terms of the inplay trader, the rule is largely redundant due to the importance of the market perceptions being less important (due to the exposure to the underlying event which has far more significance.)

Of course, there is a slight overlapping of approaches here (over-reactions in the pre-off markets can over-react just like inplay markets causing both types of trader to be enticed to open their respective positions) but both are coming from different perspectives. In fact, combining both approaches together could very well be a profitable route but I would anticipate that you would need a "hybrid rule book" in that case!

To be honest, I think Cassini would have been better in extracting rule 3 instead of rule 2, as that appears to be one rule which has most aligned significance for both types of trader. Poor money management can bankrupt the very best cold traders, inplay traders and out & out value bettors.

Regardless, this is some decent discussion here (I wish there was more of it around these days) and its probably a sign that people are generally better off sticking to what they do best!


Man of Mystery said...

Oh well, I'm in the minority as usual. I'm going back to my cosy home now. Seriously though I don't have the time right now to comment more here.

I will tomorrow though. :-)

Cassini said...

Look forward to it MOM...

Graeme Dand said...

As you say JPG, nice to see some decent discussion!

Cassini usually chucks up an oddball every now and again. I just wait with my bat to hit a home run!

Great post Cassini.


Brian Coplin said...

This is an excellent debate and I will be adding my 2p at some stage too. The most important rule to me is there is no such thing as a bad profit. It keeps you honest and stops you making those big mistakes. When the jockey easies up and loses you the race. I don't have the same discpline as you guys hence I have coded my bot to have the discpline.

Man of Mystery said...

Well guys, I feel like the defendant here. And rightly so looking at the opinion I'm against. Well, that brings me nicely to my contention that value is a myth. Because value is all about your personal opinion. This is the only point I'll address today because I ain't the fastest typist!

I'll nail my colours to the mast here. Based on my few years of experience as a bookmaker at the South East England Point to Points - don't laugh now - where Dave and I had the number 1 pitch together I stand by my opinion. I am not for turning.

Dave would be first up with the prices for virtually every race. He always had an opinion. His tissue would reflect value for him. Sometimes he got it right. Often he got it wrong.

All the other "bookmakers" would do is go a little bit bigger than us. Did they offer value? No. You couldn't get any more than a tenner on. We'd take the lot until we were filled up. We never knocked anybody back any amount if the price was still on the board.

So did we offer value for the punter? Not in Dave's opinion, no. But we'd stand up in a field when it's snowing and take a good few quid. So what was happening? Well, there were loads of mug punters there who just wanted to get on. But there were also a fair few professionals that only bet with us whose knowledge of horse racing may have been better than Dave's and was certainly far superior to mine. They weren't mugs.

So why did they lump a grand or two on the favourite at a price that, in Dave's opinion, wasn't value? Why? My contention is and no doubt they would agree they felt they were getting value. Two people. Both very knowledgeable. The same access to the same of everything. Differing opinions.

And at the end of the day that's why I'm writing this. It's all about opinions.

I wrote earlier that "If I go against the momentum simply because of my opinion of value then I will not be comfortable. No matter how much I value my opinion." I stand by that statement.

I'm interested that you see it as utter rubbish Graeme. There's another post scheduled on that topic for Monday so, if it's ok with Roberto, I'll mention it here when I've done it. For me to do it now would simply take too long. It's the first night of my partner being away in Germany so you know the old saying?

Sorry Graeme, no doubt your head is in bits by now. If your wife needs a cleaner to mop up the mess I know a very good one in Brighton as I see you're in the UK. Please let me know and I'll despatch her immediately. My expense mate. LOL.

'Ere Cassini and leave my mate Brian alone. LOL. Catch you later. And good luck to you all as always. And BTW if any of you fancy comng on the radio show in January please let me know. A three way debate would be interesting. I think I'd lose with you lot having double the airtime than me. But I'd be up for it and it could be fun. What do you think?

Anonymous said...

MOM, if Dave lost money overall to certain punters then clearly they were getting value and Dave wasnt. So how does that make value a myth?

In terms of outright "punting" on a event, the ones who profit are those who have the skill & judgment to beat the market overall. This skill & judgment forms opinions, and as you quite rightly said, betting is all about opinions. In this example though, these particular punters were better at forming their opinion then Dave was.

From the way you describe it, Dave was either reckless or extremely confident. If you're good enough, then theres absolutely nothing wrong running your book that way. But on point to points, that approach is asking for trouble. The benefit was as you alluded to, the "competition" were useless, they were effectively "momemntum bookmaking!"

This whole thread/blog entry appears to be revolving around different perspectives. MOM, trust me, your dismissive nature of value in an outright betting sense is extremely flawed.

HOWEVER! In the context of trading momentum, your rule DOES have merit. I might be wrong but I believe that when you authored the rule, you were thinking along the lines of "well, this company in my opinion is worth £10 per share but the market are selling it like crazy at its now £9 and falling further" Here, if you are momentum trading, your rule is close to perfect and very handy dogma. If your trading momentum, you are better off dismissing your opinion in the short term and following the market even if it goes against your opinion that the price "should be £10 when its trading shorter and getting shorter."

Transferring this as a catch all rule for outright punting (and in play trading) is flawed though as the punter here isnt trading on the markets perceived change in view/opinion of the event but merely that he can value the "ultimate expiry" value of the event better then the market average any given time.

The differences are subtle, which is probably why Cassini extracted the wrong rule to highlight (in my opinion!) but they are important.


Cassini said...

MOM “So why did they lump a grand or two on the favourite at a price that, in Dave’s opinion, wasn’t value? Why?”

Because, by their calculations, the price Dave was offering WAS value. Sports are not like roulette - we know the true odds on a single number are 1/37, so anything paying 37-1 or greater is value. Long term you will win. Value still exists in sports, it’s just that no one knows for sure what the true probability of an outcome is. It’s impossible to know. One bad decision, one misstep, one fluke and the game goes the other way. It is what makes sports so fascinating. BUT - if we as punters do not regularly find value, then we are ulimately going to be losers. To win long-term, you must be getting value more often than not. Get out and Green-Up says John, and yes, this will work often for little. But it is not a long-term strategy, because as I wrote on my blog today, it means you are exiting your position for no good reason. Value exists, even if we can’t determine it precisely.