Gambling profit and loss, the numbers that matter.

Lately I've been looking to do more analysis of my results.  I think I've admitted in the past, that this hasn't been a strong point of mine.  In the middle of April I decided to ask Betfair for a spreadsheet of all the tennis matches I had traded since the start of 2007, so that I could catch up.  Since then, I have kept my own sheets with every match in it, the volumes I traded, average odds and match stats too.  In that time, I've traded 200 matches, and the analysis of this is becoming very worthwhile, with some pleasing and not so pleasing results.

So what are the numbers that matter?  And why?

You want to work out the average of your wins and losses.  The mean of all your results.  Clearly this is showing you what a match is worth on average, the sum of all your work is in this number, the bigger the better.

Next is your average win, and your average loss.  When you win, how much on average is that?  And the same for when you lose.  Now compare these two numbers, are your wins on average bigger than your losses?  If you lose on average more than you win then it's clearly going to be quite a battle, I know this from experience!

Now work out the percentage of markets you win on.  The size doesn't matter, just look at where you won and lost and work out a %.  This number, combined with the ave. win and ave. loss determines how well you are doing, and will describe to some degree how well your strategy is working, and maybe what type of strategy you are using.

For example, you might be someone who scalps a lot of trades or backs short prices where your win % is very high, but your average loss is much bigger than your average win.  Or perhaps you don't win often, but when you do, the payoff is much bigger than the loss.

You have to juggle these numbers and get them in the right ratio in order to win with your strategy.  If you are a trader, it describes something of the balancing act you are trying to perform.  (Ideally, this analysis would be made on individual trades and not overall market results... if you keep detailed enough records to do such analysis, then that is excellent, I don't, yet...it gets complicated with uneven matched amounts etc)  Though it's not an exact representation, your win % effectively shows how often you are right, but you will need to run your winners longer and cut your losses quicker than than this %.

For example, if you make 5% on an ave. win, or lose 5% on an ave. loss, then the % of times you are 'right' needs to be over 50% to make a profit.

My own figures show I lose slightly more on average than I win, but crucially, the % of markets I win on is 60%, so I'm ahead.  This is not the way I would like it however, emotionally, it is much easier to average more on a win than on a loss, it can often feel like 2 steps forward, 3 back, but a 60% win ratio keeps it going in the right direction.

Emotional stability is important for maintaining discipline.  Keeping records like this allows you to actually see a bigger picture of the war you are fighting rather than the losses you might take in individual battles - which inevitably stick in your mind longer than the wins.

It's this emotional side of things that can wear a trader down over time, we're all different in how we handle losses, some push on and are able to accept things, others suffer negative pangs on the back of each loss, causing further damage down the line.  This is a good point to introduce another statistical measure - variance.  More accurately, standard deviation!

Many people will remember this from school with some dread, it's worthwhile doing.  It gives you a measure of a set of results around the mean.

• A good article on variance and standard deviation.
• How to work out the standard deviation.

Typically around two thirds of your results will fall within one standard deviation.  In simple terms it's a display of steadiness or consistency of results.  If you are one of those people uncomfortable with large swings in fortune, then you need to work on keeping this number lower.  Regardless of how low you keep this, there will always be some randomness to the path your profits and losses take.

Here is a superb resource from vertical solutions called the P&L Forecaster.  You enter your average trade, result, week or month etc and the standard deviation of those results and it produces a 'forecast' for the next 100 measures of your unit.  Eg, you work out your average week, and the standard deviation of all your weekly results and enter these numbers, it forecasts for the next 100 weeks.

It's important to note that this is simply a measure of how varied your next 100 results could be.  Try the same figures again and you will get a different looking chart each time, because of the variance in your P/L.  Play around with it a bit, enter in some high standard deviations, and some low, notice how up and down a high variance set of results is and how smooth a low standard deviation chart looks. 

This should be telling you how important the bigger picture is and how random you can expect your results to be.  It helps to understand that losses (and wins) are part of the picture, you can't get down too much when you lose and high when you win.  As Brett Steenbarger says, "chance alone will affect the paths of returns. A trader who understands that it's not just about returns, but risk-adjusted returns, can best adapt to these trading realities."

And so we return to the smaller picture.  The interesting thing I think to be learnt from this is that the macro image is determined by the micro details and actions we take when trading.  A series of results where the win is bigger than the average loss, is down to individual trades with good upsides and small downsides (which happened to be more likely to occur than the market thought). 

Getting an extra 0.5% on an opening bet or closing bet can change the variance in your P/L, managing positions better in terms of risk and reward has the same effect.  As does selectivity and patience.  Cutting losses ultimately reduces the size of your ave. loss, running winners the opposite effect to your ave. win, both reduce the need to be 'right' so often. 

So, everything is interlinked down to the fine detail in trading terms, but our mindset and emotions need to be centered on the macro scale of things, understanding how each individual trade, market, week and month, affects the bigger statistical calculations.  Some things I have found most rewarding from this analysis:

• Cutting losses quickly reduces my average loss, and in turn makes improving the bigger picture a lot easier to achieve.
• Taking profits in order to 'get back on' later, (I call this my churn rate) has reduced my own variance slightly, by not looking for such big payoffs, which in turn require more time and potential for losses.  Result: ave. wins and ave. losses are both slightly smaller, so standard deviation has dropped... My P/L Forecaster chart has been smoothed out slightly and perhaps I'm less on edge that I might be.
• Waiting for more premium risk/reward opportunities has helped get the averages closer to one another or even favouring the win side since I did my analysis.

Most people still don't keep records of their activity, without records you can't really see where you are going wrong.  You might not even know you are going wrong, which is the major hazard with 'mental accounting'.  Perhaps this is a topic for another post..  for now I'll leave you with a couple of my figures, my win % is 60%, and the standard deviation of my wins and losses 3 days ago was 5018, now down to 4701.

Comments

[Snauwaert]

Good work man, do you have MSN? We might have something to share.

[Matt]

I do have MSN, but I prefer to use it very sparingly. It's better if you email me, puntdotcom@googlemail.com.

[Graeme Dand]

Hi Matt.

Thanks for the comment on my blog. Amazingly, I only stumbled across your blog about 3 weeks ago and I’m still catching up with the historical blog posts!

I’ve found some of your posts fascinating and I referred to one of your posts a few weeks ago on my blog as I lost a large amount on a bad trade and I had read your blog the previous day about how losing ‘Betfair money’ should hurt! I lost about a 10% of my profit on Betfair on that trade and it subsequently resulted in me reducing my balance on Betfair.

I’m relatively new to Betfair and only really started to use my account from the start of this year, so my progress has been much better than I thought if I’m being honest. I hope it continues!

Like you, I think it’s important to keep track of your results but I think looking at the standard deviation of your trades may be taking things just a little too far if I’m being brutally honest! I basically keep a spreadsheet of my day’s trading with the number of races traded, races won, lost or scratched and the time I was trading. I like tracking things like this as I can relate to them much better.

I don’t track the size of wins or losses although I know that my average loss is about 3 or 4 times my average win but with my trading strategy, this makes perfect sense to me.

I’m going to do a post tomorrow at some point regarding the last month of trading and I’ll put up some of my stats about my trading. Keep an eye out for it!

Good luck with your future trading.

Graeme

[Matt]

Hey Graeme, welcome along & thanks for such a great comment :)

I have subscribed to your feed now (I'm still only just getting used to feed readers!?) so I will be watching out for your figures !

The reason I find SD important is to help me determine some feel for whether I'm simply being lucky or not. I'm still learning about the various tests that can be done with it, but I think if you google "t-Test", you might have an idea of the direction I'm looking in. Basically, I'm trying to produce a figure that demonstrates whether I'm on the right track or not, or shows the degree to which I'm possibly just being lucky.

I have a lot of results to analyse, and I think SD becomes important because the amounts vary wildly. For example, my results from two days ago varied from a loss of £275 to a win of £4338, with a few others in between.. this was actually a remarkably steady day for me. Last year's Wimbledon saw me have my 'wildest' day ever, incurring losses of £30k and £18k and still ending the day up £10k! I think most people would understand if I said that I was rather drained in every sense of the word at the end of that one! It's quite possible I could have lost a very large amount of money that day, had luck gone a different way. These sorts of strategies (madness!) I'm working to minimise.

[Nick]

Hi Matt,

Interesting read, sounds like it should help you although I'm not sure NNT would agree with the SD and prediction stuff! I've come from the other side really, I've always analysed all my betting, probably over analysed and in hindsight I've been over-cautious and safe and not made as much as I should have. Never thought I'd say it a few years ago but I'm going more towards gut feelings now and taking a pince of salt on the figures, as my comedy hero Stephen Colbert says "there's more sensors in your gut than in your brain, I don't know that for a fact but that's what my gut tell's me"

Nick

[Matt]

Hehe, great comment Nick!

Yeah NNT certainly wouldn't like the standard deviation stuff, and certainly not predictify! Though, perhaps he would, it does prove no one knows anything! I've already had some predictify questions completely change direction since I asked them, it's quite funny to see people 're-predict' and change their opinion.

The figures stuff and particularly the SD analysis is more a tool for me to 'see' the sort of randomness that's in my trading. I might even say more importantly the level of emotional torture I might be exposing myself to! (sounds too harsh than it really is..)

It's proving quite motivational, I needed something to show me how poorly I'm managing my losses, and not taking my winners soon enough. It's time I smoothed my P/L out and made some attempt to reduce the effect of random fortune over my own fortune. Especially as I've made a leap in understanding of my tennis strategy recently which proves I'm not re-accessing my winning positions enough.

Saying all this, I too am trading a little more on feel and gut... especially where the sentiment of the market is concerned. IF we are traders, then what is it that ultimately lets us in and out...it's the market (sentiment).

Great comment and I love the quote!

[Nick]

Matt, the funny thing about that quote was that it was in front of the worst gut thinker of our times - George W Bush at a White House Dinner. I don't know if you've read it but Blink by Malcolm Gladwell is an interesting book on gut feeling, a bit that sticks out to me is an example of a tennis coach who had a 100% success rate on picking service faults on the ball toss but didn't have a clue why, even using slow motion camera's .etc. The conclusion of the book are pretty obvious, gut feelings are a result of experience but can be dangerous in the wrong hands.

Look forward to reading how you did on the fashion show in South London...

[Matt]

I have listened to 'Blink', I spotted an audio copy of it a while ago and decided to give it a go. I need to listen to it again, but that guy calling the double faults is one thing I remember very clearly. Gut feeling is very powerful and accurate if you listen correctly, actions taken as a result of them need the right frame work.

Yesterday was an interesting day for me at Wimbledon, I did a large heap of silly money on one match with brain failure, though I was also a tad unlucky with how things went. Anyway, we move on, it was one market and I traded the rest nicely and in keeping with what I'm currently trying to do... we just won't do that again, 'in the future'.

With regards to analysis, I just stumbled upon a nice quote from Ed Seykota which I think sums up in some ways how I'm currently feeling about the subject, "psychology motivates the quality of analysis and puts it to use. Psychology is the driver and analysis is the road map."

The analysis is feeding back into my psychology and ultimately this enhanced experience from further markets will be continually adding to my instincts.

[Loocie]

Hi Matt,

great blog!
I am a beginner in trading sport events, so I am very happy about reading your blog and learning from your thoughts and experiences. I analysed my last month and could get some interesting stuff to have a look at when trading.
I reffered also to your blog.

All the best, Loocie

[algo]

Great article stressing the importance of chance in trading results.

A word of caution on assuming a normal distribution for results however (ie 66% of results fall within +/- 2std.dev of mean. if your method is backing short odds/scalping you wont have a normal distribution of results but very skewed to the left. same goes for backing longshots ie very skewed to the right.

[Matt]

Thanks Loocie! I have to say I love your blog entry, I have added a link on punt.com and a direct link on mini.punt.com. I'm very happy you took from my article the importance of seeing the bigger picture as a way of keeping discipline on a smaller scale. ..analysis as a psychological road map...

[Matt]

Thanks algo, that's a very good point to make, perhaps I should have stressed this more in the article, though I think it's sort of countered by the fact you have win/loss ratio combined with av. win and loss sizes... these should balance things out. Glad you posted that though.

I think on the whole the main point I was trying to make is that the bigger picture will show up the sort of fight you have on your hands on a day to day basis. If you are scalping, or backing short odds, then this will obviously show up in the figures... I'm sure most people that employ those strategies will already be aware that their losses are bigger than their average win, but there is the chance that some people might not realise the psychological effects this could have at times. Scalpers may not have realised the speed at which they cut losses has to be just as quick or quicker than profits, or just how often they need to be on the right side of things to make a profit in the long run. It helps to evaluate the pressure.

Whatever strategy used, analysis can never be bad, avoiding 'mental accounting' is important for everyone. These numbers as I have found, can provide a lot of motivation.

[Tim]

Matt

I had seen your post in my RSS feeder - and had ear marked it to sit and spend the time to 'understand' and 'digest' it as opposed the normal scan i do on most of the posts in my reader.

WELL worth the wait - and a massive thank you for taking the time to put a post like this together.

Superb post