No, it's not a mistake! After some football posts I decided to try a trading one, where I’ll explain my views on why the most famous trading saying: “Cut your losses short and let your profits run”, doesn’t apply, at least totally, to in-play sports trading.
Cut your EV- decisions short and let your EV+ decisions run!
To the best of my knowledge, these words are attributed to David Ricardo and were written for the first time in 1838, on “The great metropolis” Vol. 2, by James Grant. Nowadays, if you are somewhat related to the world of stock exchange and/or forex/sports trading is virtually impossible not to have heard about this, it’s everywhere!
So my question is: how does an 1838 saying about the stock exchange, applies to sports trading? The short answer: like most economists’ theories, it only makes sense for controlled environments with low volatility and well-defined patterns. Do in-play sports markets present these features? No!
Perhaps more relevant to the question, you can have a profit from a EV- (negative expected value) decision and have a loss from a EV+ (positive expected value) one. Furthermore, imagine this scenario: you open a EV+ position, the market goes against you, and you close your position with a small loss out of respect for Mr. Ricardo; later (seconds sometimes), you see the market go in your favor, but you’re already out! To get things more complicated, now imagine this: you take an EV- position but the market somewhat favors you, you let the green run only to see it turn red. If you've traded long enough, I’m sure these scenarios ring a bell!
Ironically, there are situations where you should cut your profits and others where you should let your losses run, a bit at least. My point being: you should cut your EV- decisions short and let your EV+ decisions run! Of course, I’m not saying Mr. Ricardo insight is wrong, far from it. Nonetheless, taking it too literally without thinking, may be detrimental to your in-play trading. I’m repeating “in-play” because pre-live trading is another world.
Million-dollar question: how do I know if my market entry has positive expected value?
The person who creates some sort of trading software which rings and says “Congratulations Mr. Unknown, you just took a EV+ decision!” will be very wealthy and admired by all traders! The fact is: between EV- and EV+ decisions there is a massive grey area. The ugly truth is the only way you can get close to an answer is by intuition based on trading experience. Of course, you can make some kind of calculation, but it would be a very complex process as the conditions change from match to match.
Personally, if you gave me my own set of traded positions after a match, I could tell you that the whole set is EV+, but if asked to classify every single position I would be in trouble.
Food for thought aplenty, but you’re giving me nothing to work with!
Keep in mind this EV issue and trade with purpose; if you’re trying new things every day and give up on a strategy each time you have a loss, you’ll never evolve. The markets are very cruel sometimes, but we only tend to remember the times we were unlucky, believe me, if you've traded long enough you also have had profits you didn’t deserve! Also, when you're on the ladders, it's easy to forget that when you take a position, there is someone on the other side taking the exact opposite one. What makes your decision better than his/hers? (Better stop, this could make another post!)
Blog balance and further directions!
After eight posts, I can tell you I’m enjoying blogging and it's helping me to stay involved. Nonetheless, posts like this one are a bit harder to write than the match reviews. So, it would be great if you could give me some feedback, for me to decide whether to stick to football or mix in some trading topics now and then. Also, discussions about the post are very welcome, as always!