bedtime reading

i have put together the following list of some of the papers i found useful, informative or just interesting during the development of the robot project. they come from a variety of sites, and range from the anecdotal to the analytical and mathematical:

• introduction to gambler's ruin - gives the maths behind risk of ruin calculations
  
• risk formulas for proportional betting - this is heavy on the maths but basically contains a lot of very good formulas on bet sizing and risk of ruin
  
• a perspective on quantitative finance - this is by e. o. thorp, and deals more with stock market and hedge fund trading
  
• a new interpretation of information rate - this is the original kelly criterion paper by j. l. kelly jr., published in 1956
  
• the theory of gambling (1, 2, 3, 4) - a book by e. o. thorp with a lot of interesting stories as well as easy to understand maths
  
• the kelly criterion in blackjack, sports betting, and the stock market - the best explanation of the kelly criterion
  
• the first wearable computer - how to win at roulette using a toe-operated computer, another e. o. thorp paper
  
• a guide to casino mathematics - from the university of nevada at las vegas, gaming studies research center!
  

i also started to write a paper myself, on the design and implementation of the robot. i explain how i wrote the software, what problems i found and how i solved them, the maths and reasoning behind the project and so on. i don't know whether or when to release it, since it would certainly make it easier for someone else to duplicate my program, although i believe that anyone capable and motivated enough would not need the information anyway. i'll decide what to do once it's finished.

and, i've now put some more capital into the robot's account and i'm running it 24x7 so i'm hoping that it should show some good results over the next few days...

strategic policy decisions

so, as it turns out, all was not right with my robot at all! i now need to re-seed it with more capital, but having done plenty of analysis of my initial trading (interestingly, it turned over more than GBP 30K of trades on just GBP 250 initial capital) i know what an optimal (and profitable) strategy should be. looking at the graph below, should show that if i ignore one type of trade (a 'lay' bet, that is a bet that something will lose) and had just placed normal 'back' trades, the system would be clearly in profit and growing steadily. i also note that the periods when i was risking a larger than advisable (that is, multiple-kelly, rather than fractional-kelly) percentage of my stake, the fluctuations were larger and profit almost negligible.

this shows profit and loss lines in blue for lays, red for backs and green for the total - the dots underneath are volume (number of bets).

i now need to wait until monday, when i can put more money into the account, however i hope that by then i will have access to a server where i can run the system 24x7 (you know who you are - thanks!) and see how the newest strategy works out over this week.

i've read so many papers on gambling, trading, risk management, capital allocation and probability in the last week, that i don't think i really remember any of them that well. it's been quite hard to translate a lot of them into anything that actually makes sense or is useful in the real world. many start off with unrealistic assumptions, or something equivalent to "first, consider a spherical cow..."! i did, however manage to get some good advice on improving my robot performance (financially speaking) and a lot of them are actually quite interesting in their own right, and i'm going to go over them again - i'll choose a few of the best and post some links here.

the importance of qa!

it's not always plain sailing, running a software robot that trades on internet exchanges - there's a lot of variance/volatility in your minute-by-minute earnings, and sometimes it can make you very nervous. it doesn't matter how much i've proved to myself that mathematically i'm sure to make money in the long run - a 75% drop in your bank balance is quite a shock to any belief in statistics. having said that, i'm not all-in with this game yet - still just using my initial GBP 250.00 stake money, but this is the first time in a few weeks that the level has gone below 'break even', and it was up at GBP 1000.00 at one point.

so, i've been busy changing the logic and money management heuristics today, and i think i'll need to sit down with my fellow cabal member and discuss strategy in depth before putting more of my hard earned dollars at risk! maybe a look at the kelly criterion would be useful?

it's not easy money, you know, or everyone would be doing it...

working - not working ...

well, i'm not working anymore (technically)! i, erm, 'resigned' from my job a couple weeks ago, which was a real shame. the resignation was kindof forced, due to issues that were generally my fault, so i should have really avoided it. anyway, i enjoyed the work, and met a bunch of great people. still, the interesting thing is that this may have actually been a good thing...

i've now started work on a new project that is just as interesting as security work, but should be more profitable, at the very least. i'm reluctant to give away technical details, but in broad strokes i'm running an automated trading system on an internet based exchange. the system determines the correct value for trades and places them automatically. i'm not sure how long it'll take for me to be able to run the software from a remote server and retire to a beach sipping pina colada, since everything is still being tested, but that's the general idea.

the software is written in java, with linkages to some native c code for speed. it's been a fair bit of development, but i've had some help from a friend who's doing a similar thing, and so far we're both in the black. i think the best part has been just seeing the thing work, and knowing that the software i developed is doing it's thing properly and is making money for me. it's different to just finishing an application or a game or whatever, and seeing that running properly - the thrill is not just in getting the software all present and correct and debugged, but in knowing that you've managed in some sort of way to 'beat the system'. and i guess the risk, knowing that if you fucked up - bang go your savings and that beach/drink scenario!

anyway, it's still early days, and i'm going to keep at it until i'm earning a similar amount to what i would as a security consultant (or, at least, as long as it pays my rent and bills, and keeps me in all the bad habits i'm accustomed to). there's also plenty of other electronic markets out there that a software agent could make money from, so i'm also planning on modularising my code, and building a library that can be used on any site that has trading potential

back to 'work' for the moment, then...