Thursday 18 December 2008

Deer 2009

The holidays are almost upon us, and this will be my final post of the year. I am preparing to close out 2008 with a couple of weeks away from the Internet visiting with family and friends in Surrey, North Devon and Dorset, eating and drinking too much, though not to the excesses of my youth, (with the possible exception of the Weymouth stop).

2008 has certainly been an eventful year. My ‘traditional’ investments (house and shares for example) are all worth less than they were a year ago, but with just two losing months on the betting exchanges (and one of those being a mere £70 doesn’t really count!), 2008 is my best year to date, exceeding 2006 and 2007 combined.

I still make mistakes however, although less often, and when I do, my ‘Bambi-in-the-headlights’ act is usually a lot shorter than it used to be when disaster strikes. I am getting better at not falling in love with a position, and with letting winning trades run. I do still have a tendency to go ‘on tilt’ after a big loss though, as evidenced by the increased probability of following a bad day with another bad day and I need to work on that.

There was also the introduction of the Premium Charge which affected my numbers, although I have to admit, not as significantly as I first feared, but one wonders what other tricks Betfair have up their sleeves.

BETDAQ is still a work in progress. As much as I would like to use them more, I still find the liquidity there sadly lacking. Faced with the choice of making £20 on BETDAQ or £50 on Betfair less the Premium Charge, well, it’s not much of a choice really. And sadly, with the introductory 2% commission offer scheduled to end in a few days, liquidity is unlikely to improve significantly.

Goals for 2009: Continue learning. Trading is an art, not a science. There are no ‘systems’. It’s all about the approach.

And finally there’s this blog. I started it back in March, with an opening post which included the following sentence “So, as arrogant as ever, I am hoping to fill this gap with a blog that goes a little deeper into the reasons why I made or lost money, my thoughts and emotions as the win / loss was happening, and perhaps filled with other observations from the world of betting”.

It’s not easy finding something worth saying about the world of betting on a daily basis, and I don’t try. I do try and find something to say every two or three days though, and hopefully some posts achieve the goal of being interesting and thought provoking.

Happy Holidays, and Good Luck.

Tuesday 16 December 2008

Kelly Criterion

There is currently some debate on the Betfair as to the merits of the Kelly Criterion, and I thought I would post an excerpt from a piece I wrote some time ago on the subject.

In Kelly's analysis, the smart gambler should be interested in "compound return" on capital. He showed that the same math a colleague (Claude Shannon) had used in his theory of noisy communications channels applies to the gambler. The gambler's optimal policy is to maximize the expected logarithm of wealth.

Though an aggressive policy, this offers important downside protection. Since log(0) is negative infinity, the ideal Kelly gambler never accepts even a small risk of losing everything.

Fortunately for non-mathematical people, you don't even have to know what a logarithm is to use the so-called Kelly Criterion. You should wager this fraction of your bankroll on a favourable bet:

Edge / Odds
Edge is how much you expect to win, on the average, assuming you could make this wager over and over with the same probabilities. It is a fraction because the profit is always in proportion to how much you wager. The edge is usually diminished by tax or commission. When your edge is zero or negative, the Kelly Criterion says not to bet.

Odds is a measure of the profit if you win.

In the Kelly Criterion, odds is not necessarily a good measure of probability. Odds are determined by market forces, by everyone else's opinions about the chance of winning. These opinions may be wrong, and in fact MUST be wrong for the Kelly gambler to have an edge.

For example: The odds on Red Rum are 4 to 1 (i.e. the market estimates that Red Rum has a 1 in 5 chance of winning, or a 20% probability), but by your calculations, Red Rum has a 1 in 4 chance of winning (i.e. odds of 3 to 1, or a 25% probability).

Assuming your estimation is correct, then by betting £100 on Red Rum you stand a 1/3 chance of ending up with £500. On the average, that is worth £166.67, a net profit of £66.67. The edge is the £66.67 profit divided by the £100 wager, in this case 0.67.

The Kelly formula of edge/odds, is therefore 0.67 / 4, or .1675. This means that you should bet 16.75% of your bankroll on Red Rum.

A quick search of the Internet will provide you with links to a number of easy to use Kelly calculators.

Unlike some mathematical formulas, the Kelly formula does have the virtue of being easy to remember.

By always making the Kelly bet, your bankroll will increase faster than with any system.

However, gamblers need to understand that their progress and bank balance will not be a smooth upward slope, but will be interrupted by frequent drawbacks. For this reason, a common practice among investors and gamblers is to use the Half-Kelly bet. This greatly reduces the volatility of the Kelly bet, but returns 3/4 the compound return. For many gamblers, that is a price worth paying.

It can be shown that a Kelly bettor has a 1/2 chance of halving a bankroll before doubling it, and that you have a 1/n chance or reducing your bankroll to 1/n at some point in the future. For comparison, a “Half Kelly” bettor only has a 1/9 chance of halving their bankroll before doubling it.

For sports betting, there is the added complication that the true odds on an outcome are not known. When calculating your Kelly bet, your estimate may well differ significantly from the true odds.

Both under-betting and over-betting will give you a reduced rate of return. Under-betting, which the Half Kelly is, will provide steadier growth, but with reduced returns, whereas over-betting can be fatal, as betting twice the optimal Kelly bet results in almost no long-term growth at all.

Most gamblers are probably best served by using a flat 2% of their bank per bet, since figuring edges in sports is, as mentioned earlier, very difficult. For a season-long win rate of 55% (on a bet paying at evens), a good target for most bettors, this represents a little more than 1/3 Kelly, which is a conservative compromise between risk and return.

Increasing this to 3%, or occasionally 4% on an especially good play, is reasonable. More experienced gamblers, with a good understanding of the downsides of Kelly and an above average ability in estimating betting advantages, may wish to adopt the more aggressive Kelly approach to maximize their returns.

Thursday 11 December 2008

The Apprentice

In the book, "High Probability Trading" the author, Marcel Link, writes "From everything I've ever heard, read and seen, a trader needs about 3 to 5 years to get through the learning period. During this time in which he is learning and honing his skills, a trader will be paying his 'tuition of trading' the same way lawyers, chefs and doctors pay to learn their craft".

I joined Betfair in April 2004, so I should be about done with my apprenticeship.

When I read that piece, I rather thought the author was exaggerating – something along the same ultra-cautious lines that McDonalds informs us that the contents of our coffee cups may be hot, or a fitness magazine tells you to seek medical advice before embarking on a 10 minute a day walking program.

However, after my 4½ years, I think he may have been under-estimating. Either that or I am a slow learner, because I am still learning. The numbers suggest that I am getting better, but every once in a while I do something that makes me question my sanity.

Another piece of advice that I am often reminded of was to concentrate on PPC, an acronym for "Preserving Precious Capital". He says "forget about making money, just try as hard as possible not to lose any" and "the key to being a winning trader is to not lose a lot when you lose. If you cut losses, the winning trades will take care of themselves".

Richard Wildman

Some of you may well have been followers of Richard Wildman and his very interesting Bet Trading: £100 to £100,000 blog.

You will be saddened to hear that he has passed away after an almost year long battle against cancer. My condolences to his wife Sam and young children children Rebecca and Harry.

It's news like this that makes one realise how unimportant winning and losing is in the whole scheme of things.

Live, laugh, love.

Wednesday 10 December 2008

Greater Fools

I read an article recently about an American company called Webvan who delivered grocery orders placed via the Internet. To cut a short story short, the company’s valuation increased from $375million to $8.5billion on the day the stock went public, but within two years, the company was bankrupt.

But the part that caught my attention was this:

“But it wasn’t just faith in the Internet that led speculators to bid up Webvan’s price. They also had faith that other people believed even more fervently in the Internet’s potential. In short, people who paid a foolish price for Webvan and hundreds of other Internet firms figured they could always find a greater fool to pay an even higher price. And many did…”

Now this is one time when, as a trader, “value” really doesn’t matter. All that matters is that your valuation differs enough from someone else’s valuation, and that you are able to trade out of your position with a profit.

Of course, the problem with this kind of trading is that at some point you will run out of greater fools, or more specifically, greater fools willing to risk enough money.

This is certainly a situation I have found with the betting exchanges. I have a tendency to go in big or not at all, and while the bet may prove to be value, at least for a time (as evidenced by a certain percentage being taken), the in-play markets can move so fast that in illiquid markets, they turn against me and I am sometimes left with a position that I have to take a loss on.

Doubling-Up On Betfair

What is this? A double overtime game so they double the markets?
I could live with the doubling up, but there are different prices on each line!
Very confusing. And the over-rounds were playing havoc with my brain.

Tuesday 9 December 2008


Every once in a while, an opportunity presents itself that looks too good to be true. Tonight was one such occasion (again).

Basketball, and with 32 seconds to go, the Miami Heat v Charlotte Bobcats game stands at 95-91, and both teams are in the penalty.

One point is needed for the game to go Over. Now in a close finish such as this, the losing team will foul intentionally, putting the other team on the line for free-throws hoping that one or both will be missed, affording them the opportunity of a quick score at the other end, thus closing the gap.

The Overs was available for a larger sum than I have available for backing (I have never requested Betfair to raise my default £5,000 exposure limit since that is usually more than enough for my needs) at 1.1 but before I could react, it vanished.

Cursing my old age and consequent slow reactions, I was about to check the handicap market when the same huge sum popped up again at 1.12. This time there was no holding me back. The bet was matched, and at that same instant the Heat fouled. Two free throws coming up.

My cup of tea went flying, the cat moved with lightning speed to avoid the steaming contents, and my adrenaline kicked in to rev my heart rate up a few notches.

How ever good the value is, I still get a little excited when I am exposed... no, let me re-phrase that.

Even if I know the bet is tremendous value, I still get a little nervous wondering what key factor have I missed, but I'm getting better at trusting my Blink* instinct.

What WAS the true value at that moment? I would say that 1.01 would be close, for even if BOTH free throws were missed, the Bobcats would still foul the Heat and put them on the line and so on...

Anyway, the first free-throw went in, and that was that, though I wish I'd had more available to bet with. For the record the game actually ended 100-96.

* Blink by Malcolm Gladwell is about the first two seconds of looking--the decisive glance that knows in an instant. Add it to your Xmas list.

Sunday 7 December 2008

JAGIS and the Under / Over Markets

Regular commenter JPG (the provocative devil) got me thinking again about the Under / Over Goals markets.

As my regular reader will know, I have written in the past about the futility of these markets, but in the light of JPG’s prompting, I decided to re-evaluate it this week. My thinking is that if JPG can make money in these markets, then darn it, so can I!

Although I have watched football for over 40 years, (and even played for Holland* in my youth), I can’t claim to be able to predict or read a game well enough to make money from it, but trading the Under / Over markets following certain rules doesn’t require an in-depth knowledge of the game.

So as with all trading, we need to determine entry and exit points. Unfortunately the market does not signal the ideal entry / exit point of ‘just before a goal is scored’ but there are others.

It appears to me that the entry points can be narrowed down to two types:

1) Pre-determined (i.e. enter the market prior to kick-off, at half-time, after x number of minutes or after a certain change in price).

2) Event-determined (i.e. enter the market just after a goal is scored (JAGIS), a substitution, a yellow or red card, a change in tactics or conditions etc.)

Exit points can be similarly Pre-determined or Event-determined.

Historically, my entry points have always been somewhat arbitrary, as have my exit points, but after much pondering I have settled on a new strategy. Enter the market JAGIS. My exit strategy remains to be decided upon, but for today’s experiment in the Everton v Aston Villa game it was to exit after a target price had been reached.

It worked rather well. The early goal for Aston Villa meant I could lay the Over 2.5 at 1.56, and go Green-All-Over when the price climbed to 1.68. Then when Everton equalized I layed the Overs at 1.24, greening-up again at 1.34. (I wasn’t totally comfortable with this strategy after two goals because another goal kills the bet – perhaps after two goals, I should switch to the 3.5 goals market?).

Anyway, a nice little profit today but further analysis is required. Not to mention that I still need to address the issue of what games to try this method in, although if one isn’t too greedy, then it may be a profitable strategy in any televised (i.e. liquid) game.

On a side-note, there was some serious damage at the end of this game with an equalizer and then a winner both scored in time added on. £62,313 traded on the draw at 1.01. Ouch.

I’m a firm believer that 1.01 bets can be, and often are, value, but I seriously question whether 1.01 in a one goal game is EVER value in football. Which gives me another idea…

* Holland Sports FC, in Hurst Green, Surrey – not the ‘other’ Holland you may have heard of.

Sunday Footy Lays

There are three 'big' games today, two Premier League matches and the East Anglia derby.

I have run the numbers and my selections are lays of home teams Norwich City (2.73 v Ipswich Town) and West Bromwich Albion (2.8 v Portsmouth).

Interestingly enough my numbers for Everton v Aston Villa are almost exactly the same as the market's - I have Everton at 2.86 and the exchanges have them at 2.82, and I have Aston Villa at 2.825 with the exchanges at 2.8. So, no bet there.

Update: One winner, but a net loss on those predictions. New rule: no betting in derby games!

College Ball

College Football in the United States is a big deal, unlike England where 'college' sports consists of the Boat Race. That's it.

OK, so we could possibly include the Varsity Match, (incidentally, my school always gave us this particular afternoon off with encouragement to head off to Twickenham while the teachers presumably took the opportunity to go Xmas shopping), but I have never been to either event, and no doubt there are other college sporting events, but none capture the public's imagination.

The US is quite different though, with college sports being a huge part of the sporting landscape. College Football crowds are enormous, (with some people taking up more than one seat!), but seriously Michigan attracted over 112,000 for a game in 2003, and the average over 791 games of top-level games in 2007 was 46,962. Several Premier League clubs would envy those numbers, although of course most teams only play half a dozen or so games at home each season.

Anyway, the reason I started writing this post is to point out how ludicrous their system of deciding the national champion is each year. Basically teams are rated by various people voting in different polls) and a computer working out who the top two teams are who then get to play in the National Title game.

As of this morning Alabama was top-ranked, with Florida ranked at number 4. Alabama was unbeaten in 11 games, whereas Florida had lost once (by one point) back in September.

These two were playing each other today in their Conference Championship (don't ask), and one might expect Alabama to be favourites, but no, Florida were 9.5 points favourites and won by 11.

One can't help but wonder why the computer used to calculate the spread isn't the same one used to calculate the rankings. It's just stupid to have a team ranked at number one when the market (i.e. everybody) knows they are NOT number one.

Wednesday 3 December 2008

Roulette System - Win Or Your Money Back

I have a Roulette system, one that comes with a money-back guarantee. Look at the table layout from above - notice anything strange?

I think the 19 reds and 17 blacks means that the evens on Red is a fair deal (and if it wasn't an American wheel with the double zero, we could all give up our day jobs and turn pro).

Sadly, I suspect that were we to travel to St Helena, we would be disappointed and find that the layout in use actually has a black 28 and not a red one. Darn it, so close.

Now why was someone so keen on value looking at a roulette site I hear you ask?

I shall explain. Years ago, when I was a young man, (ok, so it was many years ago), I read an article, the gist of which was that because the numbers on the roulette table were not spread evenly (e.g. the middle column has 8 blacks to 4 reds, the 3rd column vice-versa), then it MUST be possible to combine bets to produce a winning system.

I am still waiting to hear of such a system.

The truth is that NO bet at roulette is at true odds, and no combination of two or more bets at unfavourable odds will produce a winning system.

I was reminded of this when reading a post on the Betfair "General Betting" forum where someone named Slicer is claiming to have 'discovered' the Holy Grail of football betting - a guaranteed 100% system on football by placing two bets, with the occasional third bet. Except that sometimes the third bet is actually more than one bet!

Bet 1 allegedly is to lay the Half-Time 0-0 score. Bet 2 is allegedly to back the Full-Time 0-0 score. Bets 1 and 2 to return equal profits, but Bet 3 is the subject of much debate and apparently many hours of wasted time.

With 553 posts to date , it seems there are a lot of gullible people around. Quite simply, for this to be true, then one market MUST be out of line with the true odds, and if this were the case, the market would soon pick up on it. Once again, no combination of unfavourable bets can possibly produce a winning system, but nevertheless, the 'hunt' goes on with conferences being held to discuss various ideas.

Good luck to them. I can personally think of better things to do with my spare time, (not that I have any), but the 'discoverer' must be having a quiet chuckle at how naïve some people are.