- What is the variance? Where is the edge?
- Net results vs. number of trades
If only it was that simple.
How often have we heard someone claim a losing streak is just “bad variance”? On the flip side, rarely do winners attribute their success to “good variance,” do they?
Even if you find a viable edge on a betting market, profits aren’t necessarily guaranteed in the short term.
Numerous punters reckon they can manage the rough patches and get variance, but do we truly grasp its full impact? I tested this with my own wagering records on a specific approach at 7x7Bets.
A $5,000 bankroll
20% Kelly staking where possible
$496,000 turnover
$14,600 in closing Expected Value (the projected profit based on my advantage)
2.94% Closing EV return on investment (ROI)
$22,500 actual profit
4.54% actual ROI
Average odds placed - 2.38
Average true closing odds - 2.34
The first thing you might notice is that my actual profit and ROI is bigger than I would expect.
Indeed, when you consider the long-term trend of my earnings against the closing line, it’s stayed above it for most of this duration. So, have I just been fortunate? Absolutely, as the chart below will show:
If luck has been on my side in this run, then the question for you is how likely is it that my results could be replicated if someone was using the same strategy as me?
Before you respond, try answering these:
Using the same parameters and over the same number of trades as I mentioned above, what’s the probability…
That someone else would make $22,500 in profit?
That someone else would perform worse and only make $15,000 in profit?
That someone else would perform better and make $35,000 in profit?
Of losing the entire $5000 bankroll?
This was tested over 10,000 simulations and the results are below:
Did the results astonish you? They surely did for me. There was under a 13% chance of achieving the results I did. I realized I was fortunate before this simulation but I didn’t grasp HOW fortunate.
Thankfully, the simulation showed that it was virtually impossible for me to lose my entire bankroll using my strategy and implied edge.
Yet, there’s still a rare chance of seeing an overall loss. With around 10,000 or so trades, that’s what one should expect, yet many bettors lack the patience, bankroll management, or mental strength to watch this scenario unfold.
The graphic below isn’t a flying comet made of coloured yarn, but a visualization of the simulations that were run.
You might notice some of the simulations do show a net loss over the first few thousand trades but all gradually turn more profitable as more bets are logged.
So we’ve concluded that I’ve got rather lucky so far, but what might I expect for the next 10,000 bets I place?
Actually, there is a 20.5% chance that I make no more profit and my bankroll stays static, but a 54% chance that I earn at least another $7,500. The odds of me reaching $50,000 profit during this period are slim (2.5%).
The final graphs I will show you are the simulations after 20,000 and 30,000 trades.
What do you notice? What strikes me is the fewer outliers with extreme values. You can tell because the lines are more tightly packed together with a larger volume of bets.
Final thoughts
This is just one scenario and the data isn’t foolproof, but it illustrates how variance can be more unpredictable than we reckon, even with a strategy that sports fairly low average odds. It gives even more reason to hang tight during a bad losing streak and not to get too cocky during a hot spell.
If you’d like to give it a go yourself, the sportsbettingcalcs site is ready for your simulations. You might uncover some intriguing insights!
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