Why Live Results Just Doesnt Mirror Back Testing

[ShaunWhite]

you simply have to take every trade that comes along which meets your criteria even if it means going through a losing streak.

Streaks will happen, I remember a while ago there was a streak of about 30 losing favs on the horses (could be wrong about that). That's why escalating stakes are a no no and why it's the strike rate over many hundereds or thousands of events that matters.

There's a formula for the likelihood of streaks for a given strike rate but I can't remember it.

[xitian]

Welcome to the world of systematic betting! For a system which is more gambly, which yours is because you're not trading out and a sport like football has large discrete jumps in prices, it can be quite hard to tell if you have something which will be profitable in the long run. At least you've done the first right thing which is to question your live results early on, and not just pile in more money to recover because your backtest said it would work!

I'd agree with what everyone else has mentioned, but just to reiterate:
- Definitely not a big enough sample. For something that's gambly (thinking betting on an outcome rather than trading changes in a price) then I'd expect you to need 1000s of samples. I have a football strategy which I test over a year of data which bets on around 30,000 matches in that year. I'm /pretty/ sure it's profitable, but even then I've probably overfitted my parameters to an extent.
- First thing to check is that your live trades match your simulated system. So re-simulate over those few days that you've bet live. Does the simulation give you the same P&L as live? If it does, at least that confirms your backtest during your backtest period would at least have matched real betting. If it doesn't then it means your backtest system doesn't represent live betting close enough for whatever reason (and there could be quite a few reasons for this).
- I can see how stopping after 3 losses in a day sort of acts as a stop loss, but there are better ways to handle that. If your system works, there's no reason to stop early - you're just throwing away opportunities. Since each football match is an independent event, and you've shown with a realistic backtest that your bets are good value then a losing run of 3 should eventually be recovered. You only really need a stop loss for operational losses or if you have no faith in your system. I personally don't use stop losses.
- Once you've increased your sample size, see if your strategy is robust by tweaking your parameters. If it only works for very specific parameters then it's not likely to work long term and you've probably stumbled on it by luck or by overfitting the parameters.
- There's more I could add, but I'd just advise you search the forum for other posts about determining system profitability. There are a few.

Good luck!

[theuktrader]

Dear Xitian

Could you clarify the difference between betting and trading. You said betting is where you are making a decision on an outcome whereas trading is where you are making a decision based on price. However in both cases what decides whether you are in profit or not is what happens in the game (I am making reference here to trading inplay).

Leaving an open back or lay and allowing the event to run to expiry is no different to trading financial options where you can initiate your trade and allow it to run to expiry. However they dont call financial options gambling. They call it trading. So unsure as to why in sports trading that a trade that is allowed to go to expiry without doing the corresponding back or lay is deemed to be gambling/betting.

I thought gambling was going to your bookies and taking their odds on offer whereas trading was using a financial exchange platform like Betfair to buy/sell with other people on the exchange.

Probably just semantics but curious to know what people think as its an interesting one.

Cheers

theuktrader

[Kafkaesque]

Dear Xitian

Could you clarify the difference between betting and trading. You said betting is where you are making a decision on an outcome whereas trading is where you are making a decision based on price. However in both cases what decides whether you are in profit or not is what happens in the game (I am making reference here to trading inplay).

Leaving an open back or lay and allowing the event to run to expiry is no different to trading financial options where you can initiate your trade and allow it to run to expiry. However they dont call financial options gambling. They call it trading. So unsure as to why in sports trading that a trade that is allowed to go to expiry without doing the corresponding back or lay is deemed to be gambling/betting.

I thought gambling was going to your bookies and taking their odds on offer whereas trading was using a financial exchange platform like Betfair to buy/sell with other people on the exchange.

Probably just semantics but curious to know what people think as its an interesting one.

Cheers

theuktrader

One major difference is your bankroll management and staking. Always trading out allows for a much more aggressive staking approach. As soon as it becomes a "sometimes letting it run", the line between what would be sound staking for betting and trading becomes quite blurred, and you're likely left between a rock and a hard place. The rock being using staking that's too aggressive and gives too much variance and/or, risk. The hard place being not aggressive enough meaning not using your bankroll as efficiently as you could.

[ShaunWhite]

Could you clarify the difference between betting and trading.

viewtopic.php?f=2&t=15067&hilit=gambling+and+trading

[ShaunWhite]

Leaving an open back or lay and allowing the event to run to expiry is no different to trading financial options where you can initiate your trade and allow it to run to expiry. However they dont call financial options gambling. They call it trading. So unsure as to why in sports trading that a trade that is allowed to go to expiry without doing the corresponding back or lay is deemed to be gambling/betting.

It's very unusual in financial or sports trading to allow a trade to expire, the position is being managed. Expiry might be the best decision but it wouldn't have been opened with that express intent.

[Bluesky]

Hi uktrader welcome to the forums, you have had some really good advice in this thread. As someone has already mentioned one can use a far larger portion of ones bank if one intends to trade out before the end of the sporting event.

What percentage of your bank are you risking on each trade? There are formulae to help you calculate the optimum stake such as the Kelly criteria, however you need to be very confident in your strike rate to be able to use it.

I think if you are risking more than 5% of your trading bank on each trade then that is too high, in fact 3% might be better until you have more confidence in your strike rate.

[theuktrader]

Hi There

If there is say a 70% probability of something happening (between X point in time and expiry) based on data accumulated over many trades and you are placing your back or lay to initiate the trade,then if you place a trade and then look to trade out before expiry then by trading out before expiry you are then lowering your probable strike rate because the data behind the strike rate is based on the whole window of time from X until expiry. So the question is does the lower strike rate plus a larger reward (because you are not losing your whole initial liability) overcome a higher strike rate with lower reward.

It could be that each scenario balances each other but worth testing.

Thanks

[xitian]

Dear Xitian

Could you clarify the difference between betting and trading. You said betting is where you are making a decision on an outcome whereas trading is where you are making a decision based on price. However in both cases what decides whether you are in profit or not is what happens in the game (I am making reference here to trading inplay).

Ok, well a few others have covered this already and there was that lengthy thread linked to by Shaun. But basically my two cents is that betting/gambling is when your P&L will depend on the outcome of the event, and trading is when you have a closing trade and are predicting the price movement rather than the outcome. Trading should result in a much higher strike rate, but should also have less scalability and margin on turnover. I would suggest that beginners aim for trading to start with as it's much easier to know if a strategy works or not, however trading is harder to backtest as you'll need detailed timestamped data. You shouldn't need as much history though - for example my football trading strategy is always profitable over a 3 or 4 day span so I'd probably only need a month or two data to show that.

As for whether price movement and eventual outcome are related or not - ultimately yes, but you don't have to directly predict the outcome to profit from price changes. For example volatile markets suggest inefficiency which is what you're targeting when building a trading system.

In the end, everything is a gamble/bet - either you're betting on the outcome or your betting on the price change. It's no different in financial markets, but they're just less "taboo" than betting on sports for a living. I might argue that financial markets are slightly less of a zero sum game (and therefore has more utility) than sports betting but even then generally there's a winner and a loser behind any financial trade. Perhaps a "trade" should really be defined as a win-win for both parties in which case in sports betting no one is trading at all! Anyway, we should really move this part of the discussion back to the other thread.

[xitian]

If there is say a 70% probability of something happening (between X point in time and expiry) based on data accumulated over many trades and you are placing your back or lay to initiate the trade,then if you place a trade and then look to trade out before expiry then by trading out before expiry you are then lowering your probable strike rate because the data behind the strike rate is based on the whole window of time from X until expiry. So the question is does the lower strike rate plus a larger reward (because you are not losing your whole initial liability) overcome a higher strike rate with lower reward.

It could be that each scenario balances each other but worth testing.

That's a good thought process, and like you say, you just have to test which is better. But it's also a good example of why if you're trading out, the "value" of your closing trade is just as important as your opening trade.

What I'd suggest is that you need to re-evaluate at every timestep as to whether your position is still good value or not. You say you know with 70% prob at point X that something will happen. Well if that thing hasn't happened by point Y, what's the probability then? Would you still have opened your position at Y? If not, maybe it's more beneficial to close (because you'll know for that particular instance you were wrong), but then is the price that you take for closing worth what it's offering if the spread is large? What about at point Z? etc... (Note, for beginners, I'd probably still suggest closing even if you're taking a bad price as long as your strategy is profitable overall in the long run. You'll get consistency even if you're throwing away a bit of value. Move to riskier strategies when you have a solid base.)

Making a decision at point X and leaving it is definitely more gambly than accessing your position at point X, then 1 sec after, then again 2 secs after, etc... I'm sure PeterW is continually managing his position all the time, so why shouldn't a systematic betting strategy? If your strategy depends on point X as an input, and only works for X then you have to question the reason why. If you have no good reason then you're probably just overfitting to historical data.

[theuktrader]

Hi Community

This will be my last post on the topic as don't want to labour the point as there has been good feedback.

In regards to the fact that from Point X to expiry the chances of a successful trade is constantly decreasing.

So as an example. Let say you have a strategy where for certain matches which meet a specific criteria that 65% of games which are 0-0 at 30 minutes then have a goal scored before the HT (if you lose the trade you lose 1 point and if you win the trade you win 1 point so it is a positive expectancy system).

The 65% applies for trading results taken from 30-45 minutes. However what you find is that generally from the stats the split of goals by time generally smooths over to be the same for each minute in that period of time. So for 500 trades at 65% there were 325 winning trades where a goal was scored and approximately the goals came virtually equally for every minute (30,31,32,33,34,35,36 and so forth). So within reason, 20 winning trades came on 32 minutes, 20 on 37 minutes, 20 on 42 minutes and so forth.

So naturally there is more chance at minute 30 of having a successful trades as opposed to minute 43 (so if you decided to open your trade at minute 43 and wait till expiry you would probably have a 25% success rate or lower).

However if being a trader means you always close your position then where would you close the trade. At minute 33, at minute 35, at minute 39. Would you close the trade at minute 39 because you know at minute 42-45 there is less chance of a goal coming than there was between minute 30-39. What if you closed the trade at odds of 1.05 when its like 45 minutes and just a minute or 2 of injury time left, does that mean that by closing it is a trade whereas if you allowed it to go down to 1.01 and expiry then its a bet and not a trade.

This is why I treat probability as a whole for the period meaning for me there is no point closing the trade before HT expiry because the data applies to 30-45 and I dont know when in that period of time the outcomes wanted will take place.

I just want to add the final contex. This applies to leaving till expiry because at the end of the day the reward to risk is 1:1. Obviously in a lay the draw system where you are laying the draw at the beginning of the match you wouldnt allow an open trade to go toward expiry since the liability would be 3-5 times the initial lay.

So maybe its best to contexualise when I am talking about leaving it to expiry its where its a positive expectancy system where the risk:reward and win rate provides a positive expectancy.

I hope I make sense.