Trader247 blog

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Re: Trader247 blog

Postby Captain Sensible » Mon Jan 29, 2018 11:18 pm

negapo wrote:The classical example is the one Daywalker made, for instance, you know the true/fair value of an odd is 2.40. The odd is trading at 2.30 so (excluding commission from the discussion for now) you would make money laying the selection. But what if you know that, by some sort of cognitive bias, with a 95% probability bettors will take that odd to 2.00 in the next hour and for the remaining 5% probability the odd will go to 2.40. Then, with this scenario, its more profitable to back the selection at 2.30 and then close the trade later at 2.00 (i can make the demonstration if someone finds it useful).


Surely you're throwing away value if you back at 2.3, backing poor value prices will cost you in the long run. If you know there's a 95% probability it'll go 2, why not just lay at 2 if you know the true value is 2.4.


negapo wrote:
There are other scenarios when the bet itself doesn't hold the value but the trade does like when arbing between markets. There are other complex scenarios when the bet has value but the trade becomes more valuable at some point in time. Imagine that a selection is trading at 2.40 and the fair value is 2.10. If you back the selection at 2.40 you will be paid 1.40 - Commission on (1/2.10) 47.6% of the times and lose 1 unit on (1-47.6%) 52.4% of the times. If the commission is 5% the expected value of this bet is 11% (or 11 cents per pound/euro committed).
So you bet 1€ on the selection at 2.40 hoping the Schrodinger cat is alive and waiting for your statistical 0.11€. Meanwhile the odd drifts to 2.10 and you start to think you will be better of if you close out the trade. If you do the math, its true. If should be able to lay 1.143€ at 2.10, making a locked gross profit of 0.143€ which means a net profit of (0.143€ * (1- 5%)) = 0.136€. That's a 24% improvement on your PL, and that's a lot of money at the end of the year.


In this case you believe the price should be 2.1 and you can close for 2.1 taking the profit you expected to take, so hard to see anyone actually disputing or querying that on values grounds.

I think when you're manually trading a lot of decisions are made on the fly plus you have more info to base decisions on and there may well be opportunities where you can get in an out quickly to re-use the bank multiple times. With botting you're generally limited to price data only so should really be opening when your bot percieves value and by the same token closing only if it perceives value too.

One thing you might ike to try to see where you're obtaining value is to download your betting history and simply sum the totals of your back bets and lay bets. In an ideal world both should be showing a profit as it'd show you're getting value from both sides of the bet. I'd also put money on the fact your biggest profit will be on the side you open with most either backing or laying.
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Re: Trader247 blog

Postby negapo » Tue Jan 30, 2018 11:47 am

Captain Sensible wrote:Surely you're throwing away value if you back at 2.3, backing poor value prices will cost you in the long run. If you know there's a 95% probability it'll go 2, why not just lay at 2 if you know the true value is 2.4.


Because you make more money when you back at 2.4 and close at 2.0 than laying at 2.0 and waiting for the final result. Ill invite you to do the math, it's very interesting (i'm not trying to be condescending here, it is very interesting).

We do come from very different worlds of trading (i find that fully automated strategies fit me well, from what i understand you prefer the hybrid or discretionary way) but in my opinion neither one of us is right or wrong. Don't know if you had the chance to read the Jack Schwager book Market Wizards, he makes this point along the way when interviewing successful traders from both worlds.

This is just my hypothesis, an untested opinion: I do believe that everything can me modeled and converted to rules that a computer can execute. i think that discretionary traders have those rules on them but sometimes they cannot be turned into explicit thinking because they are wired on system 1 (taking some ideas from the Thinking, Fast and Slow book from Daniel Kahneman).

I do analyze my PL extensively, but with other methodology just because my strategies and my trading are different.
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Re: Trader247 blog

Postby Captain Sensible » Tue Jan 30, 2018 1:56 pm

Don't worry about being condescending I've a thick skin.

The thing is you're backfitting your scenarios to prove a point, if we know with 95% probability something at 2.3 will go to 2's then that 2.3 is massive value at that point in time and your initial assessment of it being a 2.4 shot is obviously wrong. The reality is very few of us can predict that kind of accuracy with a bot and no one is talking about holding onto value they're talking about not giving away value. In the scenario you gave no one would hold onto the prices taken because 2.3 would be the value back and 2 the value lay.

If we take things back to basics we'll only win long term gambling if we obtain value, the same applies when trading, we need at least one side of the trade to be value in order to have a chance of profiting. Obviously our optimum aim would be to have both sides of the trade value bets as we'd then profit from our lay bets and our back bets, simply suming your bethistory will show you if your betting is unbalanced and to what degree you're leaking potential profits.

Obviously from a bank management point of view people may well want to close but that's a different matter. Most people with bots won't place more than 1 opening and closing bet per runner and it's likely there effort at finding value is in the opening bet with the closing bet having little thought other than to close the position nd ultimately leaking value. Again a simple summing of opening bets and closing bets will higlight the fact for most botters.
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Re: Trader247 blog

Postby negapo » Wed Jan 31, 2018 12:31 pm

I think your right on many points Captain Sensible, but also that you are missing some, i'm going to go straight to it, two points:

Commission Matters
In a commission free world you are right, there is only one true / fair price so if you take two opposing bets on a selection at different prices one has value by definition (or is a fair bet) and the other doesn't (or is a fair bet).
When you introduce commissions the picture changes.
A losing bet, that has an expected value of say -1% (and if you analyze your PL it shows you losing that 1%), will bring you value because it avoids commission. This is similar to some situations with taxes, where a losing proposition may save more tax than the loses on the deal. This is an example, not one from a book or pure theoretical, one that my bots encounter daily:

You find a value bet (i agree with you that you have to find value, just the definition of value that i have a different view) on a selection that is trading at 1.50 and you back it, You estimate it's fair value is around 1.45. If the selection is available to lay at 1.47, in a commission free world, you should not lay it because it has negative expected value. If it trades at 1.45, then it's a fair bet, and you should lay it because it releases funds and it ends the opportunity cost of that money.
But if you pay commission you should lay it at 1.47. Although that lay bet will appear to have a negative expected value (and it has) it will save you costs (commission).

Scenario 1
Back 100£ at 1.50, with a 5% commission your net odd is ((1.50-1) * (1-5%)) + 1 = 1.475
The Expected Value of that bet is 1,72£

Scenario 2
Back 100£ at 1.50, lay 102,04£ at 1.47, with a commission of 5% you make 2,04£ on that trade.

If you then analyze your PL you will find that the lay at 1.47, without accounting for commission, destroyed value because the true / fair price was at 1.45. But if you account for commission the conclusion is the other way around.

An extreme but realistic example: A selection has a true / fair value of 2.00. With a 5% commission everyone that backs under 2.053 and everyone that lays above 1.950 is losing money if they hold the bet to the end. Someone who trades the spread and makes multiple back trades at 2.02 and closes at 1.98, all losing bets on a hold to maturity view (negative expected value by their own because of commission), will make money.

PS: Premium charges may distort this conclusion.

You may not care where the value is (at least in the way you look at your PL)
People make money discovering fundamentally miss priced securities or bets, but they also make money modeling people's behavior. In financial markets many of the largest hedge funds in the world do this, firms like Renaissance, Winton, Two Sigma, AQR, AHL, QIM, etc, hire mainly physics, engineers, and not economists, because they make their money mainly by uncovering statistical patterns.

A simple example may be a short term trend following CTA. The fund may have discovered that investors, on average, sell their holdings on a Friday one hour before the market closes because they don't want to carry the risk overnight thru the weekend. So the fund knows that if they sell two hours earlier and buy at the market close they make money (they are exploring this herding effect, not caring about the fundamental value of the securities they trade). They make this for the 500 stocks that are part of the S&P 500 every week and it proves to be profitable.

After some months they dig in the trades (the PL) to try to improve and get some insights. The first trade is always a sell so they check where the stock traded one month after in an effort to access the fundamental value of the stock at that time. They see that 75% of the stocks went up and 25% went down. So they conclude that 75% of the first trades they put in were bad bets, value destroying trades on a fundamental point o view, and the value creating leg of the trade was when they bought the stock at market close.
Although this is true, it doesn't help in any sense to improve the strategy. They don't want to know which of the legs of the trade was right or wrong on a fundamental value perspective, they just want to know if the herding behavior is persistent.

On a sports market exchange the true value of the securities (bets) is more explicit because they are, in the end, when the Schrodinger cats reveals if they are dead or alive, discovered. The price will always be found at the end and is immune to investors / bettors opinion.

But before that, the same rules apply. Imagine that you analyze the historical data patterns and discover that bettors bet on the outcomes they want to see and this creates a behavioral bias around the goals markets in soccer. They herd to drive the price of the Over 2.5 Goals lower, independently of where the price is at (they want to see a lot of goals so they bet on that outcome), Further tests show that the probability of the Over 2.5 Goals odd going down on the 2 hours before the off is very high. So you tell your obedient bot to back every Over 2.5 Goals selection two hours before the off and close the trade right before the off.

At the end of the year the strategy proves to be very profitable but you decide you want to improve it. You analyze the PL and break it by back and lay, opening and closing trade. You see that some times the back bet creates value meaning that the odd was higher than it should be but other times it was the other way around. In some games the back bet was lower than it should be and the opening trade was value destroying.
In aggregate terms the back and lay may prove to be tilted to one side or not but this information, in this particular case, wasn't useful. Although there was in fact always a value creating and a value destroying bet the strategy didn't depend on that, your were paid for anticipating the bettors behavior.

If you don't agree on something please lets discuss, it's very interesting.

As a side point, i'm not just talking from books, i'm fortunate to be successful in sports and financial markets applying this kind of rationals and i do make a living from both. i have had the good fortune of visiting and talking to some of those hedge funds i mention above and learn from them and they do make a lot of money exploiting this kind of patters.

I do agree with this in general terms:

If we take things back to basics we'll only win long term gambling if we obtain value, the same applies when trading, we need at least one side of the trade to be value in order to have a chance of profiting. Obviously our optimum aim would be to have both sides of the trade value bets as we'd then profit from our lay bets and our back bets, simply suming your bethistory will show you if your betting is unbalanced and to what degree you're leaking potential profits.


Just this one that i don't fully agree:
Obviously from a bank management point of view people may well want to close but that's a different matter. Most people with bots won't place more than 1 opening and closing bet per runner and it's likely there effort at finding value is in the opening bet with the closing bet having little thought other than to close the position nd ultimately leaking value. Again a simple summing of opening bets and closing bets will higlight the fact for most botters.


Sorry for the long long post, i'm passionate about this issues.
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Re: Trader247 blog

Postby Captain Sensible » Wed Jan 31, 2018 3:33 pm

negapo wrote:
Just this one that i don't fully agree:
Obviously from a bank management point of view people may well want to close but that's a different matter. Most people with bots won't place more than 1 opening and closing bet per runner and it's likely there effort at finding value is in the opening bet with the closing bet having little thought other than to close the position nd ultimately leaking value. Again a simple summing of opening bets and closing bets will higlight the fact for most botters.




Not sure why you don't agree with that point. Simply adding up your lays and backs will show you if you're getting value bets on both sides of your trades. If we have £1000 winning back bets and £500 losing lay bets surely we'd be better off not placing our lay bets?

All the theorectical figures you're sticking up aren't taking into account the amount of value botters are generally throwing away when closing bets, because little, if any thought, is given to them other than some arbitary ticks. The commission side of things gets complicated but it's generally favourable for higher rate payers to generate comms not reduce them.

At the end of the day I doubt we'll agree and it's best not to clog up Daywalker's thread. Hopefully it'll at least give botters some food for thought to put in some thought as to how they close their bets and if they are losing value when closing or actually gaining it in line wth your thinking.
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Re: Trader247 blog

Postby negapo » Wed Jan 31, 2018 4:06 pm

Sure, lets do that.
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Re: Trader247 blog

Postby Daywalker » Thu Feb 01, 2018 3:09 pm

Interesting discussion.

I've added a post of some relevance.

https://trader247.wordpress.com/2018/02/01/values/
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Re: Trader247 blog

Postby Captain Sensible » Thu Feb 01, 2018 7:08 pm

"Out of interest and in response to a comment by Captain Sensible, below is a chart of the results (P&L) of all the back entry bets placed over 6 months on the Australian horses. As can be seen I’d currently be over £300 up, hitting a high of over £400 and a low of around -£300. But there is no consistency to be relied upon here. This chart suggests to me that I’m not relying on my entry being at good value with regards to outcome. Closing all these trades resulted in a steady consistent profit"

Might have been interesting to have seen the pnl for that 6 month period with all bets included and the pnl for the LAY bets only.

To be honest I think you may have missed the point as you seem to be assuming you can happily open with poor value as you'll always be saved by obtaining the value with your closing bets. So regardless of where the value is your bots will find it anyway just by going for a couple of ticks. In my experience it's very rare to simply throw bets into a market and profit long term. So that would suggest your opening bets are getting value since as far as I can see no effort is being put into closing trades other than a set amount of ticks and whilst we can profit from luck it rarely lasts.
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Re: Trader247 blog

Postby Daywalker » Thu Feb 01, 2018 10:16 pm

Thanks for reading the blog and adding your comments.

I may have missed the point.

I thought you were saying that I would only get consistent profit if I was entering at value with regards to the event outcome. I don't think I am entering at value per se in this respect.

I do assume I can open with poor value re outcome. My trade is one of statistical arbitrage. My triggers are based on market behaviour and, as such, my bot may back on a rising price, catching a single tick down before the market continues on trend.

I'm not simply throwing bets in.

The chart I included was chosen for clarity. Including the closing bet on the chart just shows an almost mirror of the entry, as you would expect. But here's the full chart to view. The colour is different but data the same. As this is produced using only the Betfair Bet History download, I added the moving average to the P&L to give a clearer line.

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Re: Trader247 blog

Postby Captain Sensible » Fri Feb 02, 2018 2:01 pm

Daywalker wrote: I don't think I am entering at value per se in this respect.

I do assume I can open with poor value re outcome. My trade is one of statistical arbitrage. My triggers are based on market behaviour and, as such, my bot may back on a rising price, catching a single tick down before the market continues on trend.

I'm not simply throwing bets in.



But your graph appears to show the opposite and confirm that you are winning because you're entering at a value price but throwing money away by closing the opening back bets. All the lay bets seem to have acheived is a consistent graph line to smooth out any variance at a cost of almost £400 profit.
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Re: Trader247 blog

Postby Daywalker » Fri Feb 02, 2018 4:02 pm

As you are an established contributer on the forum and have helped many, I can only assume you're reading the chart differently to me.

If I'd have only included the data up to the low point at the middle of the chart (an approximate 3 month period), where I would have been down 300 from my start point, on top of losing the 400 gain, would you be advocating continuing with the strategy as you can see value? How would you risk-rate this strategy?

From left to right on the chart, showing the cumulative sum of the results of all back entry bets, the first rise suggests value being found, with one sharp dip, reaching a high of 400. This profit is then lost as a run of value on the lay side results in a return to near zero. Another quick rise to 300 is then followed by a longer lay run bottoming out at -300. I would have had to add funds to pay for these losses - not my preferred bank management method. The chart continues for approx two month before staying above zero and then climbs, plateaus, climbs again to its end position at +300.

To stick with it at this point is nothing more than a gamble as there is no clear suggestion of which way the returns will go.

To be at a profit after six months that is less than where I was at after two months does not present as consistent to me. It is also well beyond my view of acceptable variance.

The result of closing out has meant that no great loss has been incurred nor needed covering. The profit has been consistent regardless of the outcome value being on the back or lay side (as previously stated these are all back entries). Note the trade p&l was still in, and making, profit when the sum-back-p&l dived to -300.

To say this chart proves outcome value is being found on entry and profit is the result of such does not, I argue, fit the evidence.
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Re: Trader247 blog

Postby Captain Sensible » Fri Feb 02, 2018 5:58 pm

Daywalker wrote:As you are an established contributer on the forum and have helped many, I can only assume you're reading the chart differently to me..


Good of you to give me the benefit of doubt.

I'm not sure how else I can read it to be honest, with any graph from a standing start you'd expect to see some variance with value based bets, eventually that should go on an upward trend depending on the systems profitability , numbers of bets, odds etc The graph shows me without the lay bets you'd be better off by around £400. The rest is pretty much variance, you'd usually test any system with smaller stakes and the odds you're betting at, number of bets etc would all determine whether you'd stick with it or try and tweak things. The fact you may have had to re-fund the account is down to your bank and risk management rather than whether a strategy is profitable long term.

Your view seems to be you can place the bets into the market regardless of value as your statistics say you'll pick up value somewhere along the trade as the runner is due to spike. So if that's the case we would reasonably expect the value to eventually be equally split over time between backs and lays with both holding their own in the share of profit as you're not predicting a trend just a spike so eventually the market could go either way. Your graph doesn't show that, whether that's due to too few bets who knows.

My view is simply that the majority of your value is coming from your opening trades as that's where the effort and basis of your strategy is triggering bets. It'd be interesting to see the graphs of your opening LAY bets to see if that
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Re: Trader247 blog

Postby Daywalker » Sun Feb 04, 2018 10:29 pm

You are right, the chart does show more value on the entry side than the close. And I would be up 400 at the end. I can't argue with your reading of the chart in this respect.

The P&L line continues to grow at a steady rate even when the value appears to be on the LAY side. This is why I don't see it mattering to my bot where the value is.

About LAY entries, this bot only enters on the BACK side due to initial testing that produced very little. When I thought about this (not getting returns on LAY entry) along with your other comments, it got me thinking that I should look more into your idea that I shouldn't be closing out. I dug out the bet history (it's not on the same pc) from the first half of 2017 and added it to the spreadsheet. This produced the chart below.

With this data the end positions are closer, 102 for trading out, 268 for not. But the overall picture is one of reduced value on the BACK side. And through those earlier months, when LAY value was prominent, the trading P&L grew at a steady rate.

Image
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Re: Trader247 blog

Postby Captain Sensible » Tue Feb 06, 2018 2:19 pm

Daywalker wrote:This is why I don't see it mattering to my bot where the value is.


But the value is where your profit lies, if your bot is suggesting the price will move down from your entry point then surely that is where the value lies. I don't know what your stats show for the exit positions, if it suggests the price can move randomly from that point i.e. there's no value in pursuing further ticks that would suggest there's no value to be had at the LAY position.

If the stats showed the price would return to the entry point surely the play would have been to double down at exit and catch the return to increase profits, if it showed further ticks you'd probably have gone for them but since ,I'm assuming, it showed no edge at exit then I'm unsure as to why you still don't believe your value is being gained at the entry point.

Now it's perfectly possible that you're exploiting your stats in the best possible way financially due to the fact the underlying edge isn't consistent enough over shorter periods,the effect of commission as negapo was alluding to, your bank size and attitude to risk etc, but long term I still believe your bot is finding value in the entry positions.
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Re: Trader247 blog

Postby Captain Sensible » Tue Feb 06, 2018 2:25 pm

FWIW, I am aware we can enter positions at poor value and still profit by a market trending to even worse value but I don't believe we can consistently enter at poor value and expect to come out on top.
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