Friday 24 December 2010

All Quiet On The Trading Front

Today is probably the quietest day on the exchanges that I can remember. No football that even slightly interests me, no NBA games on the schedule, and as you all know I am not into four-legged 'sports'. I did have a small pre-game play on the Dutch Cup game yesterday between Ajax Amsterdam and AZ Alkmaar to lock in a whopping £10.82 after commission, but Xmas Day's Al Ahly (Cairo) v Arab Contractors game I shall be leaving alone. There's an Adriatic League basketball game going on as I write involving teams with too many 'z's in their names, always a red-flag, so nothing more than a small dabble on this one.

'Tis the season for chestnuts (roasting on an open fire), so here's an old chestnut posed on the Betfair Forum a few days ago:

Do the most successful sports traders " Green Up " as soon as it is able ? or do they let the investment run longer depending on the bet.
This is a topic that frequently comes up, and it's interesting to read how some people justify this. My opinion is that unless you are in the very fortunate position of being able to lock in a significant sum of money, (in which case the loss of value could be considered an insurance premium) you should never trade out by offering a poor value (to you) bet to do so. If your stake is appropriate, and your bet is value, then you are just reducing your profits long-term by offering a value bet to someone else. One person posited this:
Suppose I am on 5% commission, and I can back heads for 2.04. If I don't green up, my expected return per toss is:

= (0.5 * 1.04 * STAKE * 0.95) - (0.5 * STAKE) = -0.006 * STAKE.

Despite backing at value, my 5% commission means that I lose 0.6% of my stake each toss.

However, if I green up at evens just before the coin is flipped, my expected return is:

= (0.5 * ((1.04 * STAKE) - STAKE)) * 0.95 = 0.019 * STAKE.

And even if I lay off my bet at 2.02 before the coin is flipped, my expected return is positive:

= (0.5 * ((1.04 * STAKE) - (1.02 * STAKE)) * 0.95 = 0.0095 * STAKE.
This logic seems to me somewhat flawed. Assuming that you are on 5% commission, why would you ever back at 2.04 in the first place? Commission has to be factored in before making the bet. This is a losing strategy as the comment shows. Yes, it would be profitable if you could lay-off at 2.02 every time, but where is the 'greater-fool'** to be consistently found? Admittedly, there could be a zero (or much reduced) commission person out there for whom a 2.02 back is value, but backing at 2.04 on 5% commission is simply a poor play in the first place, and you are likely to end up as a bagholder.

It's a common mistake for traders to see a profit, and close out their position simply because it's a profit. It makes no sense to do that. Cut the losses, and let the winners run - not the other way around. For anyone arguing that it's good to take any profit for 'psychological reasons', I'd say that they are either over-staking or just not suited for trading.

A Merry Xmas to all.
** The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.

1 comment:

Alpha said...

Happy New Year!!!

Always the best blog around

your admirer Vasilis
from Greece