The Kung Fu of Trading

[a_gnome]

A quiet end to the week: -0.9%

Friday's trading was difficult in that nothing really moved much so it was a series of small losses and small wins with the losses out-numbering the wins. Despite the outcome I am very pleased with how I traded as I stuck to what I am supposed to do without getting flustered by the lack of results. You have to take what the market gives you and sometimes there's nothing there and you must just stick to your plan.

So that's +4.4% on the week which is less than my notional target of +10% but perhaps that is rather unrealistic. What I need to do is to see what sort of results I get over several weeks when I trade as I am supposed to and then I'll get a better idea of what can be achieved. I am also only risking about 0.5% per trade which I could probably double without causing too much trouble though I need to get a measure of the type of draw-downs that I can expect when I'm trading according to plan.

All in all, I'm pleased with this performance which is much better than the results that I have been getting of late.

Onwards and upwards!

 

[a_gnome]

Monday 11th Feb. No trading today - too much work!

 

[swandro]

Gnome

I would love to know a bit more about how you are trading races. This is all new to me. Is the Snapdragon software your own or is it provided by BetFair? Can you really build a level 2 screen and bar chart based on a horse race? (rhetorical question!). Fascinating.

Not expecting a treatise on the subject but would really like to know a bit more. Thanks.

 

[a_gnome]

Gnome

I would love to know a bit more about how you are trading races. This is all new to me. Is the Snapdragon software your own or is it provided by BetFair? Can you really build a level 2 screen and bar chart based on a horse race? (rhetorical question!). Fascinating.

Not expecting a treatise on the subject but would really like to know a bit more. Thanks.

The principal is still the same as trading anything else: guess the direction of the price move right and you make money, wrong and you lose.

The details are broadly as follows: on Betfair prices are quoted as decimals so if you back a horse you get paid (1 - odds)*stake if it wins and you lose your stake if it loses. Similarly if you Lay a horse you pay out this amount if it wins and you gain the stake if it loses.

Say you think that the prices are going down so you back £100 at 3.5. A short while later it goes down to 3.0 so you lay £100 at this price. The payout diagram is now as follows for this trade:

Action----------Horse Wins--------Horse Loses
Back 3.5:____+£250________ -£100
Lay_ 3.0:____-£200_________+£100

Total:________+£50_________£0

Thus if the horse wins you gain £50 and if it loses you lose nothing. In practice you actually lay a bit more than £100 (100*3.5/3.0) so that you win the same amount irrespective of the outcome of the race. This way you've effectively locked in a profit and the only way that this can be taken away from you is if the horse is withdrawn before the race starts in which case all the bets are cancelled.

The interesting things are:
1. You only pay commission on your net profits so if you scratch 100 trades and make money on the 101st then the commission is the same as if you didn't make the first 100 trades.
2. As it's betting the profits are tax free. From what I understand the really top level race traders can make up to £1k per week.

In answer to your other questions:
1. The SnapDragon software is my own software that I've written myself. At some point I may consider selling it to other users but there are plenty of similar products already out there.
2. There is a level II as you get to see the top three Back offers and top three Lay bids.

I hope that this helps.

 

[swandro]

I hope that this helps.

Yes it does. Many thanks for the info. You have inspired me to take a closer look at "trading" horses instead of markets.

 

[a_gnome]

Excellent day: + 2.5% from only three races.

I've not been able to do much trading this week because of work commitments. I was only able to do a bit today because I needed a break. There were only three races left but they were all profitable. In fact I only had one losing trade at all and that was only 1 tick!

I'm now nearly at all-time equity highs which is excellent news. I am shortly going to start increasing my bet size but I want to get comfortably above the equity peak before doing so.

There was an interesting program on telly last night (Horizon) about decision making. One thing which particularly caught my eye was that when we have something taken away from us we tend to be more aggressively risk-taking and when we have something given to us we tend to be more risk-averse. This ties in with my past problems of over-trading to make up for losses. I hope that I have got past this now.

Onwards and upwards!

 

[a_gnome]

Thursday 14th Feb.

Again too much work to do much trading. Whilst I was running a computer job I did start up my trading software and followed a race. I put on a trade but found the software was running too slowly and unresponsively because of the background job so I turned the trade into a scalp and decided that there was no point in trading under such conditions. Fortunately the one trade was +0.4% which happened to take me to new closing equity highs. :clap:

 

[a_gnome]

Friday 15th February

Difficult trading conditions: -0.2%

I managed a full trading session today for the first time this week but the 6 races that I traded were not particularly co-operative. Decent moves were few and far between so I didn't trade much. I'm happy with my performance in the circumstances as in the past I would have traded much more and would have lost a fair bit.

 

[fcmisc]

2. As it's betting the profits are tax free. From what I understand the really top level race traders can make up to £1k per week.

Where does this statistic come from? Do you think there are any traders who consistently pull out £1k per day?

 

[a_gnome]

Where does this statistic come from? Do you think there are any traders who consistently pull out £1k per day?

It's just what I have heard anecdotally and I can't back up this number though it does feel about right for the big boys who are pushing the market around with trade sizes of £1000's.

 

[a_gnome]

Friday 22nd February

A difficult day but traded ok: -0.9%

Friday was a difficult day with only one really good move and two races which had really nasty fake-out moves in either direction in which I got caught. The second market did look rather suspicious and I should have seen it for what it was but that's hindsight for you.

The first race was interesting because it was such low odds that the market was never likely to move very far so I had another go at a new style of trading which is pure "jobbing" to capture the spread. I did it on a much smaller trade size but it seemed work well. Clearly this is something to explore further.

What I am pleased about is that despite difficult trading conditions I kept plugging away doing what I was supposed to. I kept my losses strictly under control and remained calm and detached so that the outcome was only a small loss.

 

[rathcoole_exile]

amazing stuff ! Thanks for the insights, this is all new to me - I used to back horses pretty big back when I lived at home, but I've been away for almost a decade, living in places where betting isn't permitted and even access to racing websites is blocked.
So it's a startling revelation to see what progress has been made.
I love your charts, I keep looking at them and analysing them as if for a futures chart and the same patterns - inside bars, close below the high bar etc are all still to be found !
And the best thing is, I guess, you can make your money before the race even starts, so you can sit back and watch the action with none of the pressure. just enjoy your brandy and cigar.

fascinating, please keep this journal going....
Garry

 

[a_gnome]

Monday 25th February

Not good: -1%

It's not so much the outcome which I am disappointed with it's the fact that my discipline was slipping. There was a bit of boredom creeping in and wanting to make money when the conditions weren't right. There was one race where the odds were high and it was unlikely that there would be a good move in the price. Under these circumstances I do allow myself to scalp. On this occasion I simply plunged in with the scalping without thinking at all whether scalping would be suited to this sort of market. Had I been objective about it I would have realised that the market was not really suited - too volatile. The results was a 0.9% loss just for that race - very undisciplined of me.

There was another market where I hadn't quite got my profit target and I got rather poor trailing stop slippage so I ended up with very little to show for what was a decent move. There was then a sense of needing to make some of this back so I ended up doing a trade that I would not normally take and losing a chunk. This harks back to what I wrote a week or so ago about people being more risky and aggressive when they feel that they've had something taken away from them. I need to watch out for this.

I seem to be impatient for more profits rather than concentrating purely on the process and being disciplined and letting the profits take care of themselves. Just when I thought that I had got it all sussed! As I suspected its a process of peeling away the onion layers - you think that you've got it all away only to discover there's another layer underneath.

To put all this in perspective of course, the net results was only a -1% day and I'm only -2.1% from my equity high. The fact that even when getting it "wrong" I am still rigidly controlling my risk means that this was no disaster to my account and something that I can easily recover from. I just want to make sure that I get my discipline back on track asap so I'm coming down hard on myself now.

Sorry no charts again today. I'll get back to doing them tomorrow.

 

[fcmisc]

This is continuing to fascinate me. Especially as I'm looking into doing some horse trading of my own.

I was wondering if you'd mind posting an equity curve chart. I don't want to see the numbers you're trading, but think it'll be interesting to watch as you smooth it out and get more consistent. As an example, a friend plots his poker equity curve on his blog here: Fear and Loathing in London: January 2008

 

[a_gnome]

Tuesday 26th February

A quiet day: -0.35%

I seem to be getting a bit behind with my journal - work commitments interfering again. Tuesday was a fairly quiet day and I only managed four races. The first one was very low odds and I again had a go with my jobbing technique with great success: +0.4%. The next race was a fantastic move but I managed to miss it! I actually got in correctly and then thought that it was just a false squeeze so I scratched it only to see it continue strongly in the original direction. Because of missing out I then tried some stupid trades which I certainly wouldn't have done had I caught the original move and the net result was -0.35% where it should have been +1%. The other two races were small losers as well.

Again no real problems but there's a fine balance between being cautious and being too cautious. I have actually been trading some of the early American markets after hours and I often manage to make 1% or 2%. I did that on Tuesday and Wednesday so my account equity is actually looking healthy despite these small losses. The only problem is that this US race trading is a very different beast -highly illiquid and definitely not scalable so I am not counting it in the official results.

Hopefully I'll have time to do a full session of trading today.

 

[a_gnome]

Thursday 28th & Friday 29th Febrauary

28th: -0.8%
29th: -0.6%

These markets seem rather quiet at the moment with very few decent moves. I am noticing that I'm starting to get impatient with the lack of decent opportunities and am starting to try out new ideas to see if I can get something to work under current conditions. I came a right cropper yesterday trying out my jobbing method in a market which basically was moving too much - this cost me about 1%. On another occasion I made a little on a race but needed to hedge out my position. When I came to do this I rather cocked it up and ended up backing after it had gone in play and then covering it at a much higher price so that my hedging ended up wiping out my profits and leaving me with a loss. I did learn something from this: when you need to hedge there is a correct order in which you need to do it so something was gained there but it was rather annoying.

Today was more frustration with some quite hefty losses of -1.1% being racked up on one race. Again it was because I got into the move very late and because of this I didn't make my target and was stopped out for only a very modest gain. Because of this I tried various dodgy trades after this which I shouldn't really have taken and it all got rather messy. There were some bright notes. The final race was very high odds and it looked suitable for scalping so I went for it and managed to make a good chunk: 12 winners with no losers. As it was the last race that I was going to trade I then traded the race in-play (I risk 0.5% at worst) and managed to back the winner so that the total from the scalping and the winner was 1.5%. This made up most of my losses for the day

To cap it off I did trade one US market which was ideal - just the right amount of volatility and volume for me to make another 1.2%. As usual this is not included in my running totals.

I do think though that the lack of decent moves at present is taking its toll on my discipline. I also think that I need more carefully to assess what tactics are most suited to market conditions rather than blindly ploughing in with what ought to be appropriate for the price range. There have been some markets in what should be a volatile price range which have just gone no where and which would have been ideally suited to jobbing or scalping.

It's a learning experience - onwards and upwards!

 

[a_gnome]

Saturday 1st March

Poor: -1.3%

OK - this is starting to get a little serious. I've not had a winning day "on record" for over a week now. In the past I've had periods where I've just lost money consistently for a while before eventually things turned around. This was usually because I was trying to scalp in a highly manipulated market. I would often have drawdowns of more than 5% during such periods and it was very difficult. The difference this time is that I am losing much less than before and it seems to be for different reasons this time. The fact is that the type of markets that I am looking for haven't been around much at all recently
so I've not been making money. In addition I've been experimenting with different tactics and it's partially this which has been causing the losses. I do think that I need to re-think what I am doing though. I need to be able to assess the type of market that I have for a given race and to apply the appropriate trading strategy accordingly. Sometimes this may mean not trading.

I do feel that there is the basis for a deeper understanding about how all markets work that is distilling itself within me though it has yet to crystalise in to definite ideas. These involve the relationship between liquidity, volume, volatility and "coherence". The last is a label which describes how the chart "hangs together" as it unfolds - a coherent market makes the right sort of patterns and is basically going somewhere whereas an incoherent market is basically just noise.

Anyway - I need to get back to basics and this may mean more losses while I work out what I need to be doing but at least I have things under control.

 

[a_gnome]

Monday 3rd March

Better: +0.1%

Well, I've actually managed to post a positive figure finally. I was concentrating better and thinking about what the best method was for the prevailing market conditions. I came up with the basic idea for tactics for highly manipulated markets and I caught some good moves. The main problem was some of the higher odds markets which are quite "grainy" in that the tick size is quite large compared to the moves. If they don't actually go any where then one can easily end up losing a few ticks and these all add up. I think that I need better tactics for these markets. Maybe I also need to keep track of my results classified according to market type. That way I can tell what is working and what is not.

 

[jasont]

Hi a_gnome,

I have enjoyed reading your thread for quite some time and thought it was about time to post a reply. With your Physics background it is great to see your risk and money management that you use in trading. It is great for new traders, even though most I am assuming don't trade the horses, to see your application of capital management. After all that is what keeps people in the game long enough to figure out how to trade profitably.

Your issue of making gains early on and then later having them erode over time is not an uncommon one. Obviously you already know this with how much time you have spent with writing mechanical systems for others. Do you think the issue is an emotional one or a strategic one?

I have found that low liquidity markets such as the horses you are trading can often change personality at the drop of a hat. Usually as a result of the big players loading up positions and then incrementally getting rid of them finally to remove the supply or demand. No doubt you know the style of Jessie Livermore.

It is good to read your journal and keep it up as I'm sure there are many others watching in interest even though they may not post.

 

[a_gnome]

Tuesday 4th March

Interesting: -0.5%

Another losing day but it was interesting in that I am starting to work out what's going on.

Here's a potted history as I currently see it: I used just to scalp the markets and did pretty well. Gradually I started to trade the more liquid last 10 minutes of the period before the race began and I found that I started to lose money, sometimes quite big chunks. The reason for these losses was the manipulation of the price by the big players who would deliberately push around the price in order to squeeze out the small-time traders such as myself. This is the worst thing for a scalper who's trying to make a tick all the time and then suddenly find he's the wrong side of a 10 tick surge against him, forcing him to cover for a large loss. This lead to me sitting down and attempting to work out how I could adapt to this and I came up with Trading Strategy 001, basically a trend-following approach. This involved rigid risk parameters, later with stops added and attempted to do a certain type of trade which was comparatively long-term and therefore less vunerable to price manipulation. However it does require a certain type of market condition with plenty of movement. This disciplined approach has been responsible for getting me out of the doldrums and to new equity highs so has been great but my recent poor form is largely due to the fact that these particular conditions have been conspicuous by their absence recently.

Gradually I have been starting to consider different approaches for different conditions. I'll still take the trend trades when they turn up but I've currently worked out the following different approaches according to the conditions.
trending (moving sufficiently in one direction)
surging (artificial price squeezes by the big players)
jobbing (very liquid static prices)
scalping (requires low manipulation market, trading off the order book)
grainy (high tick values, doesn't move enough for trending, moves a little too much for easy scalping - I'm not sure yet how best to trade this

Incidentally I made 3% back on an in-play trade "after hours" on Monday, managing to back the winner all the way home. I was a little lucky but it does mean that my equity is actually pretty healthy despite the poor official performance figures.

I am viewing my current trading as being R&D at present - exploring these new tactics and honing my skills for working out which tactic is required for a given market. I'm therefore relaxed about the actual P&L figures and as long as I respect the risk and keep it tight my equity shouldn't come to too much harm.