Dear Community
Was keen to know what you would choose between the following 2 trading strategies
Strategy 1 has a win rate of 40% and the ratio of profit to loss is 4:1 and if you win you earn £200 if you lose you lose £50
Strategy 2 has a win rate of 70% and the ratio of profit to loss is 1:1 and if you win you earn £60 and if you lose you lose £60
Which strategy do you believe would be the best in the long term and why?
Ta
Mel
Higher Profit vs Higher Percentage
Strategy 1 would have the higher profits to losses ratio in the long run.
Strategy 1: 40% of the time you win £200, 60% of the time you lose £50. This is equivalent to a long term average of winning £80 for every £30 lost.
Strategy 2: Similary if you win £10, 70% of the time, and lose £10, 30% of the time, then the long term average is £70 won for every £30 lost.
So I'd prefer the first one. But if they both work, why not use them both
(assuming they don't overlap too much)
Strategy 1: 40% of the time you win £200, 60% of the time you lose £50. This is equivalent to a long term average of winning £80 for every £30 lost.
Strategy 2: Similary if you win £10, 70% of the time, and lose £10, 30% of the time, then the long term average is £70 won for every £30 lost.
So I'd prefer the first one. But if they both work, why not use them both
(assuming they don't overlap too much)So strat 1 has a plus EV of £5 per bet and strat 2 has a plus EV of £4 per bet. Therefore on paper start 1 should be used. I don't think its quite that simple though, I suspect it depends on the experience and bank size of the trader concerned.
If your an experienced trader with a decent sized bank then strat 1 would be best. If your fairly new to trading and/or you trading bank is on the small size then I think start 2 would be better to start with. Then switch over to strat 1 once both experience and bank size have increased.
I cant remember the equation to work all this out but with a success rate of 40% you are going to have some very frequent and very large losing runs. This could easily destroy the confidence and perhaps the trading bank of a fairly new trader.
If your an experienced trader with a decent sized bank then strat 1 would be best. If your fairly new to trading and/or you trading bank is on the small size then I think start 2 would be better to start with. Then switch over to strat 1 once both experience and bank size have increased.
I cant remember the equation to work all this out but with a success rate of 40% you are going to have some very frequent and very large losing runs. This could easily destroy the confidence and perhaps the trading bank of a fairly new trader.
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ruthlessimon
- Posts: 2155
- Joined: Wed Mar 23, 2016 3:54 pm
The question is can you cope psychologically with a 40% win rate? Even if I knew it was a good system, could I sit through 5+ losses in a row on big stakes? (without adjusting my system)
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marksmeets302
- Posts: 527
- Joined: Thu Dec 10, 2009 4:37 pm
This is a bit of an academic answer, but I thought I'd share it nevertheless. My answer is: it depends. If you never withdraw from your account, then go with the first strategy. Because it has a higher average profit.
It becomes trickier if you need to withdraw from the account. Reasons can be simply because you need to money to cover your expenses, or maybe it's so much you can't put it to work on betfair: better take the excess capital and put it into stocks, bonds or a savings account. Why is it trickier? because you can't predict if the next couple of results will be winners or losers. Let's say you need the money to pay for food and rent, that will make the rest of my story more realistic. Then you might withdraw just before you hit a couple of losers. In fact, so much losers that you are forced to scale down your stakes. Now come the winners, and you can't profit enough from them since you are working with lower stakes.
What works against you here is the volatility of your returns. With strategy 1 this effect is more pronounced than with strategy 2. With the first strategy, you have a higher average return, but the returns are more volatile: the standard deviation is higher. This means if you plot your cumulative profit and losses, they will a bit wiggly. The second strategy has a lower average return, but is much less volatile: if you chart it, it will be much more stable. In other words: it's much easier to predict what your total profit will be a hundred trades from now. This can be quantified by the sharpe ratio. In absence of a risk free rate, it is simply the average return divided by the standard deviation. It turns out the first strategy has a sharpe ratio of 0.40 and the second has 0.44. Therefore, the better strategy is in fact the second one.
Now, this is nitpicking if this is about betfair markets. First, you can do a lot of markets per day so you converge quickly to the average expected return. Second, it's hard to push through a lot of money, and then the above doesn't make a lot of sense either. So in that case go with xitians answer: use both
Where this *is* applicable is if you are retired and have the choice between two portfolio strategies. Interesting things pop up when you need to withdraw from your account.
It becomes trickier if you need to withdraw from the account. Reasons can be simply because you need to money to cover your expenses, or maybe it's so much you can't put it to work on betfair: better take the excess capital and put it into stocks, bonds or a savings account. Why is it trickier? because you can't predict if the next couple of results will be winners or losers. Let's say you need the money to pay for food and rent, that will make the rest of my story more realistic. Then you might withdraw just before you hit a couple of losers. In fact, so much losers that you are forced to scale down your stakes. Now come the winners, and you can't profit enough from them since you are working with lower stakes.
What works against you here is the volatility of your returns. With strategy 1 this effect is more pronounced than with strategy 2. With the first strategy, you have a higher average return, but the returns are more volatile: the standard deviation is higher. This means if you plot your cumulative profit and losses, they will a bit wiggly. The second strategy has a lower average return, but is much less volatile: if you chart it, it will be much more stable. In other words: it's much easier to predict what your total profit will be a hundred trades from now. This can be quantified by the sharpe ratio. In absence of a risk free rate, it is simply the average return divided by the standard deviation. It turns out the first strategy has a sharpe ratio of 0.40 and the second has 0.44. Therefore, the better strategy is in fact the second one.
Now, this is nitpicking if this is about betfair markets. First, you can do a lot of markets per day so you converge quickly to the average expected return. Second, it's hard to push through a lot of money, and then the above doesn't make a lot of sense either. So in that case go with xitians answer: use both
Where this *is* applicable is if you are retired and have the choice between two portfolio strategies. Interesting things pop up when you need to withdraw from your account.
what a fab response, well thought out and total accommodation for both scenarios. if i wore a hat, i'd tip it right now... +1marksmeets302 wrote:This is a bit of an academic answer, but I thought I'd share it nevertheless. My answer is: it depends. If you never withdraw from your account, then go with the first strategy. Because it has a higher average profit.
It becomes trickier if you need to withdraw from the account. Reasons can be simply because you need to money to cover your expenses, or maybe it's so much you can't put it to work on betfair: better take the excess capital and put it into stocks, bonds or a savings account. Why is it trickier? because you can't predict if the next couple of results will be winners or losers. Let's say you need the money to pay for food and rent, that will make the rest of my story more realistic. Then you might withdraw just before you hit a couple of losers. In fact, so much losers that you are forced to scale down your stakes. Now come the winners, and you can't profit enough from them since you are working with lower stakes.
What works against you here is the volatility of your returns. With strategy 1 this effect is more pronounced than with strategy 2. With the first strategy, you have a higher average return, but the returns are more volatile: the standard deviation is higher. This means if you plot your cumulative profit and losses, they will a bit wiggly. The second strategy has a lower average return, but is much less volatile: if you chart it, it will be much more stable. In other words: it's much easier to predict what your total profit will be a hundred trades from now. This can be quantified by the sharpe ratio. In absence of a risk free rate, it is simply the average return divided by the standard deviation. It turns out the first strategy has a sharpe ratio of 0.40 and the second has 0.44. Therefore, the better strategy is in fact the second one.
Now, this is nitpicking if this is about betfair markets. First, you can do a lot of markets per day so you converge quickly to the average expected return. Second, it's hard to push through a lot of money, and then the above doesn't make a lot of sense either. So in that case go with xitians answer: use both
Where this *is* applicable is if you are retired and have the choice between two portfolio strategies. Interesting things pop up when you need to withdraw from your account.
Procrastinating as always, I decided to draw up a quick simulation in Excel to demonstrate the difference between the two in practice. If those are real life strategies, then I want a piece of either of them!
I've done a monte carlo over 10000 "runs" which is roughly the number of races in the year. You can see that even with that relatively minor edge how consistent (straight) the profit line is going up for both strategies. In Strategy 1, you'd expect to make nearly £500,000 and Strategy 2 nearly £250,000. The maximum drawdown (ie. max concurrent loss from the last highest point) is shown as well. For Strategy 1, this is around -£1,200 and Strategy 2 is -£540. It does vary as you recalculate the sheet, but they don't deviate hugely from those numbers. This means you'd only ever need a bank of £2,000 to run Strategy 1, and maybe £1,000 to run Strategy 2 (over 10,000 runs). These are still tiny amounts compared to how much the strategies will win though.
If you want to equalise the strategies a bit, then you just run Strategy 1 with less stake for each bet, e.g. 100/-25 instead of 200/-50. You'll see that the drawdowns become lower but the absolute profit is equally lower.
If you really can't tweak the stake, then Strategy 1 wins hands down. You win £250,000 more, but you only need an extra ~£1,000 bank to withstand those bigger drawdowns.
I've done a monte carlo over 10000 "runs" which is roughly the number of races in the year. You can see that even with that relatively minor edge how consistent (straight) the profit line is going up for both strategies. In Strategy 1, you'd expect to make nearly £500,000 and Strategy 2 nearly £250,000. The maximum drawdown (ie. max concurrent loss from the last highest point) is shown as well. For Strategy 1, this is around -£1,200 and Strategy 2 is -£540. It does vary as you recalculate the sheet, but they don't deviate hugely from those numbers. This means you'd only ever need a bank of £2,000 to run Strategy 1, and maybe £1,000 to run Strategy 2 (over 10,000 runs). These are still tiny amounts compared to how much the strategies will win though.
If you want to equalise the strategies a bit, then you just run Strategy 1 with less stake for each bet, e.g. 100/-25 instead of 200/-50. You'll see that the drawdowns become lower but the absolute profit is equally lower.
If you really can't tweak the stake, then Strategy 1 wins hands down. You win £250,000 more, but you only need an extra ~£1,000 bank to withstand those bigger drawdowns.
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