Wednesday, 3 August 2011

Trading Without A Parachute

Average Guy wrote on a couple of topics:
Hello again, still somewhat confused "Kalmar v Mjallby, an investment that had I checked the progress of after 82 minutes, with a score of 0-0..." As a trader, I would have assumed you could have gotten out at this stage with the lions share of the profit. Is it that you only use these picks as a PC offset and hence straight bets or do you use straight bets all the time? Am I being particularly obtuse here as maybe you thought that the green up price was not value in these circumstances ?
The answer is that these bets are outright punts, straight bets not trades, and I tend not to even bother watching how the games are unfolding, and only check the results later. As a Premium Charge trimmer, they don't seem to quite be working well enough, as my percentage for last week was 19.99!
As I have written before, my problem is that while I am comfortable risking four figures on an in-play trade, a much easier place to find value than pre-game, I am not comfortable risking anything like that amount on a punt. Hence I need a lot of punts for the commission generated to offset the in-play trade profits, but every little helps. Average Guy (he doesn't say whether he is Mean, Median or Mode Guy, but Mean Guy doesn't sound very nice) continues:
I actually agree with the "Ho Hum" mentality as I'm trying to eradicate emotion from my trades and I find if I can achieve a sense of ambivalence I accept losses far easier and don't spiral back down the mug punter route.

I also feel that there is a link between the bank size and the acceptable loss size in that when my bank was small (about 50€, I know but we must start somewhere) I mentally wasn't able to accept even a red of €5 without doing something stupid. I keep it about the €250 level now (I still don't trust myself) and don't blink when I have a pre event loss of my "max red" which is about €15 now. Is there a correlation between bank size and behaviour or am I evolving (Christ, too much Criminal Minds on TV) into a better trader ?
You're evolving. No more Mr. Mug Punter! The sensible way to learn how to trade is to start small and work up. You're not going to last long if you deposit £10,000 into your account and start throwing around £1,000 at a time, but if you start with £100 and play with £2 a time until you find that essential edge, the world's your oyster. It's also worth mentioning that it is far easier in percentage terms to grow a small bank than a large one and that losing 2% of a bank is the same (relatively) regardless of bank size. If that 2% starts to hurt, then scale it down.

Betting Algorithms had a post on Risk Management in In-Play Markets a few days ago, which included this paragraph from Paul:
When you realise you were wrong in your initial assessment, and things have changed, get out with as small a loss as you can, or take a slightly larger loss and use it as the basis for a new opinion on the market direction.
I commented:
One comment on your post above is that it is not always possible to get out of a losing position at a value price, which is the key. You are correct that the 'deer in the headlights' approach when something goes wrong is not to be recommended, but in some sports with thinner liquidity and price gaps, the only price available for cutting losses is poor value, and shouldn't be taken.
To take a ridiculous example, always useful for making a point, if you are betting on Heads v Tails in a best of three and backed Heads at 2.2 pre-spin, you had great value. Tails comes up on the first spin, and shortens to 1.05. Things have changed, as they tend to do, but the suggestion that you should get out at any price is simply wrong. Lay that 1.05 all day, because that is where the value is. 2.2 on an even money bet doesn't mean a winner, but it's the only way to win.

Paul mentions stop-losses, which might be great for trading shares or commodities, but they don't work well for sports markets. Whereas share or commodity prices gap infrequently, in the sports markets they gap all the time. A goal in football is a hugely significant event, as is a late game three point basket in a close basketball game. The markets do not gently descend or ascend to the new price, but arrive in one giant leap, often after initially over-shooting the new price by some distance. It's not unusual in a basketball game for both teams to trade at 1.0x in the last minute. The NFL might be the ultimate in this, where a team can trade at 1.01 after an apparent game-ending penalty, only for the flag to be invalidated because of Note No. 5 under Article 5 under Section 2 under Rule 8 on page 54 of the NFL rule book which, as you all know, reads "Whenever a team presents an apparent punting formation, defensive pass interference is not to be called for action on the end man on the line of scrimmage" - and the other team is the winner.

Agreed that earlier on in a game, the price movements are more gentle, and I know some traders prefer trading the first half of games for that precise reason, but I'm more of a second-half, third-third, fourth quarter, bottom of the ninth, final set/frame/round kind of a person - no parachute required! Besides, the slower the prices move, the less likely you are to find value. Where there is fear and greed, there is value, and fear and greed are stirred when there's drama.

There are some good comments, and a lively debate, on the post mentioned on the topic of value. Worth a read.

No comments: