A. What is Technical Analysis?
In sports trading, you will frequently see concepts, such as “support, “resistance”, “breakout”, “order flow” and “chart patterns”. These concepts have all been imported from the financial markets.
The technical analysis concepts sound very scientific and mathematical. Even the word “technical” in “technical analysis” sounds as if there is some science behind it. How scientific are these concepts really?
In this post, I will discuss whether these concepts can be considered useful to the sports trader. In fact, I will explain why these concepts may be leading would-be traders down a rabbit hole.
B. The Financial Markets
As technical analysis concepts have been imported from financial trading into sports trading, we should first look at whether or not they work in the financial markets.
If they don’t definitely work in the financial markets, it would make little sense in importing such concepts into other markets.
If you google “technical analysis is nonsense”, you will find a lot of articles that argue that technical analysis is a load of mumbo jumbo.
This doesn’t necessarily mean that this is true. However, it does mean that opinion is divided on the validity of technical analysis.
While a lot of traders say that they make money from using technical analysis, academic examination frequently suggests that it has minimal predictive power [Browning, E.S. (July 31, 2007). “Reading market tea leaves”. The Wall Street Journal Europe. Dow Jones. pp. 17–18].
I’m not saying that technical analysis does or doesn’t work in the financial markets. I’m saying that the jury seems to be out on this.
However, you would think that there would be stronger evidence that it works when you consider that the origins of technical analysis can be traced back to the 17th century (Joseph de la Vega, Confusión de Confusiones, 1688).
If technical analysis was a powerful method of making money on the financial markets, I would expect academic studies to be able to show this consistently. So, in my opinion, there are 2 possibilities. Either technical analysis works, but with feeble effect, or it doesn’t work at all.
C. The Sports Markets
So, my question is this. If we don’t know if technical analysis works in the financial markets, why have trading gurus imported these concepts into the sports trading markets?
There is a lot of money for some people in pushing this idea. People have software and courses that they want to sell.
You have to understand the difference between an internet marketer and a teacher. A teacher has passion for his subject and hates to see it corrupted. A teacher wants to teach his or her subject and has no bias as to whether something is true or not. An internet marketer wants to sell something and the education that this person provides may be biased. Their so-called education is often designed to groom people’s belief systems towards buying their product.
Therefore, anyone associated with this kind of software (whether they own or are affiliated with the software, or they want to sell a coaching course based on the software) has a vested interest in getting you believe that technical analysis works.
So, the only evidence that technical analysis works is that, some people say that they make money using this method. While some of these people are associated with this type of software, some are not. However, you are still taking a random person’s word that this works. I’ve met losing gamblers, who claim that they are winning gamblers.
1. Is Empirical Evidence Always Necessary?
I would say no. You can use logic. The problem with technical analysis, is that there is no logic behind it. It is based on someone saying that certain patterns repeat over time. While that is possible, it should be easy to prove such an assertion.
2. What other Methods are there?
Let’s go back to financial markets. The most famous people, who have made money on the stock market are not technical analysts (Chokkavelu, A. 2010 Technical Analysis is Stupid). While successful traders have used different methods, they probably all:
- Researched the company that they invest in
- Interpret the impact of the news on their investments
They also understand the dynamics of the market. They understand how fluctuations in the price of one company or commodity affects the price of another company or commodity.
3. What are the Equivalents in Sports Trading?
Researching a company is equivalent to researching a race.
Interpreting the impact of news in horse racing may include such things as weather changes that affect the going and non-runners affecting the dynamic of the horse race.
Understanding the dynamics of the market is the same in both financials and sports markets.
What I am saying is that interpreting the market, in terms of the real world, is important.
4. Identifying the betting patterns of individual trainers and connections is important.
For example, some gambling stables appear to trick the market. One obvious example of tricking the market is when a favourite drifts until the last 2 minutes. Then, during the last couple of minutes, the horse is backed down by 20 or more ticks.
Once you identify such patterns, you find a way to exploit this. I will talk about this in a separate post. What I will say is that, the most obvious way, of trying to back a horse at the top of its range, may not be the correct way.
D. The Punters Drive the Markets
The punters drive the markets. They leave money in the markets and this affects where the odds end up. Traders put money in and take it back out. The trade will include a winning and a losing trader. However, between the winner and loser, they will break even. So, in a way, traders are irrelevant.
1. The 2 Types of Punters
There are 2 types of punters. There are normal punters and, what I call, in-the-know punters. The normal punter is the type of punter that you normally think of.
The in-the-know punter is connected to a stable and gets inside information. This is why you will often see horses with no obvious decent form getting backed.
When there is a difference of opinion between the normal and in-the-know punters, the opinion of the in-the-know punters may have a greater influence on the odds. I don’t know for sure why this is.
The reasons may be;
- In-the-know punters believe that they are getting value and are willing to wager substantial money.
- Bookmakers take the in-the know punter’s opinion seriously and will therefore shorten their odds faster than they would for a normal bet.
- Bookmakers may have stable connections and be in-the-know themselves. If they have a hot tip from a stable, they might want to take bets for all of the horses apart from the tipped horse. Therefore, the late money could be bookmakers dumping their liability on the tipped horse at the exchanges.
- Some normal punters will follow the money. This means that they will bet on the selection that is getting heavily backed.
- Normal punters are very trainer-aware. They tend to know the gambling stables and which stables are getting a lot of winners.
E. The Bookmakers Make the Markets
What about bookmakers’ money in the exchange markets? The bookmakers may bet on exchange markets to reduce their liability. This money will reflect the money that they have taken from punters. So, effectively, the bookmakers’ money is the punters’ money that’s just been moved from the bookmaker into the exchange.
This practice of also helps the bookmaker to get the exchange starting prices closer to their own.
As mentioned earlier, the bookmakers are very likely to obtain information from their stable connections. Sometimes, you see a race where all of the horses have recent form, apart from one horse that hasn’t raced for 6 months or more. This horse’s form, when it last raced, wasn’t anything special but it is in the favourite range when the market opens. It may even be the favourite. The only way that I can figure that the bookmakers know to put this horse in as the favourite is if they are getting inside information.
As traders or punters, we are outside the loop. This means that, both bookmakers and gambling stables are trying to take our money. The market is not random. As traders, we need to know we are up against in-the-know punters and traders.
F. Parallels with The Stock Market
Basically, trading on horse racing is about punter confidence on each of the horses. It works similarly to the stock market. When there is confidence in a company, the share price rises. Conversely, when
- Conversely, when there is less confidence in a company, the share price drops.
- There is the complication that confidence on one horse may affect the price of another horse. However, even this is the same as financials. For example, during a serious financial down turn, people lose confidence in the stock market. This results in the FTSE index decreasing. In times of financial crisis, people often take their money out of the stock market and put their money into gold. This results in an increase in the price of gold. This works the other way around. In a bull market, the price of gold might reduce. People figure that they will make money by investing in companies. Therefore, they sell their gold and invest in companies.
- Notice in both cases, gold hasn’t done anything right or wrong. One financial asset just affects the value of another financial asset.
- However, here is the real parallel. There are market makers in the stock market as well. As you can imagine, these market makers are likely to have inside knowledge and they may even be involved in political decisions. These market makers are likely be the first to know when the stock market is about to crash. In fact, there are some, who can cause the market to crash just by selling up.
- If they foresee a crash, they will be the first to take their money out of the stock market companies and put their money into precious metals, such as gold. This will leave other investors with stock market shares lowered in value. If they sell and invest in gold, they will be buying gold at a higher price than the market makers.
- If you see the FTSE companies as one horse and gold as another horse, the parallel between the financial markets and sports markets are obvious. The difference is that the stock market moves slower. You get a crash every few years. In sports trading, you could get the equivalent of a crash more than once in the 10 minutes before a race.
G. Choose the Correct Jigsaw
I saw a video, where a technical analyst used pieces of a jigsaw as an analogy for sports trading. The idea is that you can see the picture or guess what the picture will be, even with pieces of the jigsaw missing. It may not be about the missing piece of the jigsaw. It may be about choosing the right jigsaw.
Consider the following:
- Technical analysts may be completely using the wrong jigsaw.
- Understanding real life information is a completely different jigsaw puzzle.
I do use software. However, the only reason I use software is to get my bets in and out of the market quickly and to see the ranges that horses have been traded at. I don’t look at anything else.
If you feel that you have been taken down the technical analysis rabbit hole, you may want to consider the alternative. I intend to explain how to read the markets and how to translate it into the trading scenario on my Youtube channel. So, if you are interested in learning more, please subscribe.