Exploiting the Same Price Level more than Once and Making the Most of Limited Opportunities

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Exploiting the Same Price Level more than Once and Making the Most of Limited Opportunities

Monday was one of those trading days where there’s a decent amount of movement, yet not much going in the way of actual trade set-ups. Pivot points weren’t a factor and it took a price level to manifest on its own from the price data to actually get something worth trading.

On the 6:40(AM EST) candle, price closed out around 1.3272. The next candle was bearish, while 1.3272 was rejected again on the 6:50 candle. So here we already had the basic footing of a resistance level in the market. A common question that traders have is what constitutes a “resistance level,” for example? Basically it can be as simple as a green/up candle followed by a red/down candle. Mainly, I’m just looking for how price acts around these levels – pivot points, high of day, low of day, any type of support or resistance created from previous price history – and, of course, how price acts on its own.

I addressed this matter in some detail in these posts:

When the 6:55 candle was bearish, I felt I had what was necessary to support a put option set-up at 1.3272, expecting that the resistance level would keep price below. The trend was also slightly down.

Once price hit 1.3272 on the 7:00AM candle, I entered a put option. The trade received a nice boost down on the 7:05, and made challenges up to my entry point on the 7:10 and 7:15 candles, but the level held and ultimately expired about one pip in-the-money.

Given the set-up was still valid to me, I decided to re-enter the same trade, a put option at 1.3272, on the 7:20 candle. The 7:25 fell about five pips in my favor, before settling as about a four-pip winner.

In today’s trading, despite a grim early outlook, it came down to simply finding a good spot to trade. And since the situation was favorable, I was able to make the most of it and take two pretty good winning trades going with the trend.

As you can see below in the daily chart, the EUR/USD has been in a steep downtrend for the month of August, so with all the daily downtrends that have been frequent as of late, put options have tended to not be a bad idea.

The exchange rate is currently below 1.3200, which is a low that hasn’t been seen since the beginning of September 2020, about a year ago.

Exploiting arbitrage opportunities: From trading stocks to sports.

“Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies”

HOW HIGH-FREQUENCY TRADING FIRMS EXPLOIT ARBITRAGE OPPORTUNITIES IN THE STOCK MARKET

With today’s technology, the pricing of stocks is updated within a few milliseconds of real-time. This is way faster than a human is able to perform calculations, which makes it difficult to find arbitrage opportunities in financial markets. As a result, firms who are performing day trading are now using computers to perform algorithmic electronic trading at a speed that is impossible for humans to match. The way this works is that you give the computer a set of instructions, which will trigger it to buy or sell stocks. These instructions can be related to price, timing, volume or a mathematical model. For instance, you write an algorithm that tells the computer to buy 1000 Tesla stocks whenever the price goes above $200 and sell if the stock price increases by 10% above the purchase price. For more reading on arbitrage and algorithmic trading, check out the links.

The non-fiction book “Flash Boys” by Michael Lewis, tells the story of how high-frequency trading (HFT) firms used a super fast fiber optic cable that connected the financial markets of New York with Chicago to perform arbitrage trading. This $300m cable reduced the journey time for data from 17 to 13 milliseconds. An advantage, which enabled the HFT firms to obtain better prices on their trades compared to their competitors.

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To illustrate how this works in practice let’s imagine that a hedge fund wants to buy a 100 000 shares of Tesla stock. This purchase will be spread out on multiple stock exchanges to ensure that they get the best possible price on their purchase. As a result 60 000 shares are purchased on Nasdaq for $200 per share, but once someone buys stocks in a company, the price will increase. Thus there are only a limited amount of shares are available for $200. Once the purchase has been made the stock price of Tesla increases to $202 on Nasdaq. Therefore the hedge fund will look at buying the remaining 40 000 shares at a better price on a different stock exchange. At the London Stock Exchange (LSE) Tesla is still trading at $201 because the price has not been updated yet. What happens is that the HFT firm will notice that someone has purchased a large amount of Tesla shares on Nasdaq and therefore they will leverage their faster cable connection to purchase Tesla shares at the London Stock Exchange before the price increases to $202. So let’s say the HFT firm manages to buy Tesla shares at $201 per share at LSE. They then sell the stocks to the hedge fund for $201.99 and pocket a 99 cent profit per share. All of these events take place within a couple of milliseconds and are enabled by the firms using complex computer algorithms to perform their trading. In reality, the pricing difference is more likely down to 1 cent or less, rather than the 99 cents used in this example. However, if the HFT firm is able to perform thousands of trades like this during a day, then the profits will add up to huge sums in the end. According to the article at Harvard Politics, the HFT market produced profits of $5 billion in 2009, but declined to 1.25 billion in 2020. Also, HFT trading accounted for 73% of the total daily market volume on U.S. exchanges in 2020. A possible explanation for this decline can be found in the macroeconomics principle of perfect competition, which states that the existence of economic profits within an industry will attract new firms to the industry. The increased competition will result in diminishing returns for the firms and in the long run the industry will reach the state of perfect competition, an equilibrium where the industry profits equal zero. A second possible explanation is that the stock exchanges have improved their own connections, which reduced the relative edge that the faster connection provided the HFT firms.

According to Investopedia’s definition, arbitrage opportunities exist as a result of market inefficiencies, which allow investors to exploit price differences. Therefore it is not limited to just investments in stocks, but really any market where such opportunities exist. As a result the HFT firms also trade other types of securities such as bonds, futures and foreign exchange contracts. The rest of this article will focus on price inefficiencies within sports markets.

ARBITRAGE OPPORTUNITIES IN SPORTS MARKETS

Within the world of sports betting there exists bookmakers where you bet against the house and betting exchanges where you bet against other people. The latter can be compared to a regular stock exchange, the main difference being that the traders buy and sell bets on the outcome of events such as a football game rather than stocks. What makes the sports market interesting from a trading perspective is that it is more inefficient than the financial markets, which in turn creates arbitrage opportunities. At the free site oddsportal.com, one can compare the odds of a game provided by different bookmakers and betting exchanges, which enables you to see the inefficiencies that exist within the sports market with your own eyes. I’ve included a screenshot of the odds from different bookmakers on the Liverpool — Manchester United game that was played on 17.10.2020.

The odds of a game’s outcome reflect what the bookmaker believes to be the probability of that outcome. The probability of an outcome equals the inverse of the odds, in addition one has to adjust for the bookmaker’s payout rate, which is the amount of money that they pay back to their customers. For instance Mybet has a 90% payout rate, which means that they take a 10% cut of the money that is placed on this game. Next let’s compare the odds provided by two different bookies.

What we can see here is that the two bookies differ greatly in what they believe will be the outcome of the game. Now this leaves us with the question of which bookmaker is right and are either of them able to accurately predict the game’s outcome? The earlier screenshot above shows that Mybet’s odds for a home win is 2.40, while the closest bookmaker is at 2.27. This large deviation from the rest of the market indicates that Mybet is the bookmaker who underestimates the probability of a Liverpool win. The consequence of Mybet having mispriced the probability of a Liverpool win, by placing their odds at a higher level than the rest of the market, is that it creates an arbitrage opportunity. More specifically it makes it possible to put money on the outcome of a draw and an away win at two other bookmakers with a guaranteed ROI of 2.62% as can be seen in the screenshot below.

This is what is referred to as a surebet. The advantage of surebets is that in theory you are guaranteed a profit without any risk. However, the majority of surebets will occur at the soft bookmakers (will be defined later), which can lead to several practical disadvantages:

  1. Soft bookmakers limit sports traders who are able to win consistently.
  2. You need to find high enough odds on all of the outcomes for it to add up to a surebet.
  3. If the odds deviate too much from the rest of the market, bookmakers are able to void bets placed on that game. Imagine the following scenario: you are following the recommendation in the screenshot above, by placing money on a home win at Mybet, a draw at Vulkan bet, but when you are trying to place a money on an away win at Leonbet, you are limited to place a maximum of $1. You are now unable to complete the surebet, which results in a huge negative expected value on the bet. Now whether you are investing in stocks or sports the most important principle is to avoid loosing money, because if you loose 50% of your capital ($10 000 → $5000), you will need to increase it by 100%, just to return to the starting point ($5000 → $10 000).
  4. You will need to distribute your capital and thus tie up your capital across a very wide range of bookmakers to take advantage of the surebet opportunities.

Because of the disadvantages with arbitrage trades (surebets) listed above, a better strategy is to place a high volume of +EV trades. An example of a value trade would be to place money on a home win to Liverpool, which has a +6.06% EV. Over a large sample size placing +EV trades should be a profitable strategy in theory. This is based on the assumption that Pinnacle odds accurately reflect the true probability of a game’s outcome, which will be discussed next.

HOW EFFICIENT IS THE SPORTS MARKET?

HOW DO BOOKMAKERS DECIDE ON THEIR ODDS?

Typically an odds line will be placed by a bookmaker after they have performed a statistical analysis, which takes all the information they have available into consideration, for instance the team’s lineup, injuries and historical performance. Once the initial odds line has been set it will be adjusted based on market movements, meaning how much money is put on the different outcomes. The efficient market hypothesis used in financial markets states that it is impossible to beat the market, because the existing asset prices always incorporate and reflect all relevant information. So if an asset is underpriced in the stock market, it will lead to investors buying the stock until it returns to its intrinsic value or in other words a fair price. The same applies to the sports market, if a bookmaker underpriced the odds of a particular outcome, let’s say a home win to Liverpool, then smart sports traders will put money on this outcome until it is priced at a fair value. So for instance if someone places a $1 million on Liverpool to win, the odds will shift. If another person believes that the odds are now mispriced and that there is value on the other side, they might place $1 million on Manchester United to win and the odds will shift again and thus eliminating the inefficiency. The more money that is put on the outcome of a game, the more likely it is that the all of the inefficiencies have been eliminated. Thus the odds at the time the match kicks off will reflect all of the information that is in the market. This odds at the kick-off time is referred to as the closing odds.

ARE BOOKMAKERS ABLE TO ACCURATELY PREDICT THE OUTCOME OF A GAME?

Now which bookmakers are the best at accurately predicting the outcome of a game? First, let’s define the bookmakers and exchanges into two main categories: 1) soft bookmakers, who have a low payout rate (>= 90%) and low limits on how much money can be placed on games. 2) Sharp bookmakers, who have a high payout rate (

Now compare this to the stock market, where the price would have been adjusted within milliseconds. These market inefficiencies create arbitrage opportunities that can be exploited by smart sports traders.

BEING A SPORTS TRADER

For professional sports traders, the majority of work is put in during the weekends because this is when the majority of games are played. In a given weekend you can potentially run through your bankroll multiple times by placing a high volume of sports trades. Trades are typically placed within a couple of hours before the game starts to reduce the variance that may occur between the opening to closing lines of the bookmakers. Thus the capital of the investor is tied up in the investment for a shorter period of time. The result being that you can grow your fund much faster, than for long-term investments in the stock market.

For example, if your bankroll consists of $10 000 and you place sports trades with an average of + 3% EV per trade. +EV being the trades where you get a higher odds than the closing lines of the sharpest bookmakers. Now let’s assume that you place your trades with a flat structure* of $100 per bet and that over the weekend you place 100 bets. Then your expected profit would be: 100 (trades) x $100 * 1,03 (EV) — $10 000 = $300. Now obviously, whether you endure winning or losing streaks will have an impact on your actual profits . If we assume that there is no variance in the 100 trades we placed or in other words that we are neither lucky nor unlucky, our actual profits would be equal to our expected profits of $300. In reality, the variance will only even out if you are able to place a high amount of +EV trades.

*Your bet sizing is an important topic when trading in the sports market. You can read more about bet sizing on the following link and also run a simulation of how different input variables affect your potential profits.

CONCLUSION

To sum it up there are 3 main advantages of trading in the sports market compared to the stock market:

  1. Market inefficiencies enable arbitrage opportunities.
  2. Shorter investment cycles provide a higher potential for profit growth and reduced capital tied up in investments.
  3. Faster feedback loop on strategy performance.

Written by: Marius Meling Norheim

Disclosure: Neither I, nor Tradematesports have any affiliation or receive any form of compensation what so ever from any of the bookmakers, websites or companies mentioned in this article.

Price Level

What Is a Price Level?

A price level is the average of current prices across the entire spectrum of goods and services produced in the economy. In more general terms, price level refers to the price or cost of a good, service, or security in the economy.

Price levels may be expressed in small ranges, such as ticks with securities prices, or presented as a discrete value such as a dollar figure.

In economics, price levels are a key indicator and are closely watched by economists. They play an important role in the purchasing power of consumers as well as the sale of goods and services. it also plays an important part in the supply-demand chain.

Understanding Price Levels

There are two meanings of the term price level in the world of business.

The first is what most people are accustomed to hearing about: the price of goods and services or the amount of money a consumer or other entity is required to give up to purchase a good, service, or security in the economy. Prices rise as demand increases and drop when demand decreases.

This is used as a reference to inflation and deflation, or the rise and fall of prices in the economy. If the prices of goods and services rise too quickly—when an economy experiences inflation—a central bank can step in and tighten its monetary policy and raises interest rates. This, in turn, decreases the amount of money in the system, thereby decreasing aggregate demand. If prices drop too quickly, the central bank can do the reverse: loosen its monetary policy, thereby increasing the economy’s money supply and aggregate demand.

The other meaning of price level refers to the price of assets traded on the market such as a stock or a bond, which is often referred to as support and resistance. As in the case of the definition of price in the economy, demand for the security increases when its price drops. This forms the support line. When the price increases, a sell-off occurs, cutting off demand. This is where the resistance zone lies.

Price Level

Price Levels in the Economy

In economics, price level refers to the buying power of money or inflation. In other words, economists describe the state of the economy by looking at how much people can buy with the same dollar of currency. The most common price level index is the consumer price index (CPI).

The price level is analyzed through a basket of goods approach, in which a collection of consumer-based goods and services is examined in aggregate. Changes in the aggregate price over time push the index measuring the basket of goods higher. Weighted averages are typically used rather than geometric means. Price levels provide a snapshot of prices at a given time, making it possible to review changes in the broad price level over time. As prices rise (inflation) or fall (deflation), consumer demand for goods is also affected. This leads to broad production measures such as gross domestic product (GDP) higher or lower.

Price levels are one of the most watched economic indicators in the world. Economists widely believe that prices should stay relatively stable year to year so they don’t cause undue inflation. If price levels rise too quickly, central bankers or governments look for ways to decrease the money supply or the aggregate demand for goods and services.

Although prices change gradually over time during inflationary periods, they can change more than once a day when an economy experiences hyperinflation.

Key Takeaways

  • The price level is the average of the current price of goods and services produced in the economy.
  • Price levels are expressed in small ranges or as discrete values such as dollar figures.
  • Price levels are a leading indicator in the economy; rising prices indicate higher demand leading to inflation, while declining prices indicate lower demand or deflation.
  • In the investment world, the price level is referred to as support and resistance, which help define entry and exit points.

Price Level in the Investment World

Traders and investors make money by buying and selling securities. They buy and sell when the price reaches a certain level. These price levels are referred to as support and resistance. Traders use these areas of support and resistance to define entry and exit points.

Support is a price level where a downtrend is expected to pause due to a concentration of demand. As the price of a security drops, demand for the shares increases, forming the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.

Once an area or zone of support or resistance is identified, it provides valuable potential trade entry or exit points. This is because, as a price reaches a point of support or resistance, it will do one of two things: bounce back away from the support or resistance level, or violate the price level and continue in its direction until it hits the next support or resistance level.

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