You should not worry so much about backtesting. Backtesting is a big time waster and it will not help your trading. Backtesting is curve fitting which means that you are basically testing all these parameter values based upon noisy data. You should instead figure out the theoretical reason why an specific strategy should be profitable and then you should focus your energy in finding such trades. Backtesting, advanced statistics, complex mathematics will hypnotize you and shift your focus from trading to BS.

Once you have a theory, backtesting is an essential step in checking it. Of course, this doesn’t guarantee anything but if, for example, your strategy has not worked in the past, you at least have to explain what’s “different this time”: it’s very useful to “kick the tires” in this way. Ironically, it’s almost more dangerous if your backtest results are very good: that tends to give people false confidence. That being said, if your strategy has worked in backtests, it does give you some support to your theory.

Furthermore, backtesting is one of the ways to “avoid being hypnotized” by theory precisely because it is so concrete. There is no way - with any theory - to avoid the past-doesn’t-predict-the-future/in-vs-out-of-sample problem but, if your theory is to stand a chance it must, at least, be consistent with what has happened so far.

There are contexts in which you need to be more careful - particularly, if your trading is likely to change trading in the rest of the market - but, certainly, if your strategy going to be low-key enough not to move prices too much or have other strategic effects, backtest results are always useful information.

An arbitrage situation is when bookmakers’ prices differ enough that they allow bettors to back all outcomes and still make a profit. An arbitrage is often refered to as an “arb”.

Don’t the bookmakers know about this?

Yes they do! Bookmakers don’t create arbitrage situations with their own prices. If this does ever happen it’s because of a mistake. You can’t go to a single bookmaker and bet on all outcomes without losing money. From a business perspective bookmakers are only interested in maing money. An arbitrageur’s bet is still a good bet because, in the long-run, the odds are still in the sportsbooks favor. There is a misconception concerning a bookmaker’s need to balance his book. It is believed that with a balanced book, the bookmaker can make a risk-free profit. This is true. But even if a book isn’t balanced and a bookmaker is “short”, and the bookmaker exposes himself to a possible loss, he still makes money in the long-run because of the overall diversification of all of his bets on all different games. But even taking this into consideration, some bookmakers may be opposed to clients making money from dealing with them, without incurring risk. It is, therefore, important to take measures to disguise your activities and not make it obvious that you are an arbitrageur.

How do you make sports arbitrage work?

You must use at least two different bookmakers. Betting on all outcomes at the same bookmaker wont work. You have to find at least two bookmakers whose prices differ and are high enough so that an arb is created. This used to be quite a challenge but there are os many bookmakers on the Internet now that we have more choices of odds to choose from.

Why Do Arbitrage Opportunities Occur?

There are tons of different sportsbooks in different countries and each specialises in particular sports and is more familiar with competitors from their own local area. To compete for global business they must offer a wide range of sports from all around the World often well outside their areas of expertise. As a result many bookmakers overstretch themselves when offering odds – they try and cover every possible market to get as many customers as possible. This is great news for us because in doing so they will sometimes offer odds on events that they have little or no expert knowledge in. For example, a bookmaker in the USA may know very little about English Division 2 football games, and yet offer odds on them. In contrast, an English bookmaker will be much more “clued up” as to the likely outcomes from the same games. The result? Wildly different odds on the same games, and a feast of arbitrage opportunities and free money for us. Also, bookmakers are busy people – and when they are forced to offer odds they can sometimes make mistakes! Prices may also be based on the anticipated flow of bets rather than the probabilities of the outcomes. For example when England play soccer most bets with UK bookmakers will be supporting England. Bookmakers may offer the opposition at an inflated price to create a balanced book.

Do arbitrage opportunities REALLY exist?

Naturally, the frequency with which arbitrage opportunities arise is relatively low, since each bookmaker is careful not to ride against the general tide of opinion regarding the pricing of a sporting event. Although advantages of a few percent are not uncommon, maybe only 1 book in a 100 or fewer is capable of yielding an arbitrage opportunity. Nevertheless, given the enormous number of sporting events available for fixed odds betting today, there are still a good number of sure bets to be found each and every week. When this happens, a sizeable arbitrage opportunity may become available, perhaps offering a 5% or even 10% return. Such opportunities, however, are relatively rare. When they come along, and a bettor already has existing accounts with the relevant bookmakers, they present a good opportunity to make money. However, in view of the difficulties highlighted here, only the most dedicated arb-watcher will realistically be able to benefit repeatedly from arbitrage betting with a view to securing a regular income.

Can you really make money on them? There seems to be a lot of hype.

Although the prices may guarantee a certain profit in theory, there are a few factors that could prevent the actual implementation of the arb.

Arbitrage might seem like betting’s equivalent of the Holy Grail. No form of gambling is entirely risk-free, not even arbitrage. That fact that it is frequently and wrongly acclaimed as being so is perhaps partly due to the use of the term “sure win”. There are numerous difficulties associated with arbitrage betting that can and do eat into the profits, sometimes with potentially disastrous consequences.

The first issue to consider with arbitrage betting is stake size. The majority of arbitrage opportunities are limited to only a few per cent at best. In itself, this should not present a problem, provided the bettor has at his disposal enough cash to place the bets he w ants. The first difficulty arises, however, if a bookmaker imposes limits on the maximum size of a stake. Since an arbitrage bettor’s stakes are likely to be larger than most, this problem may occur quite frequently.

A second problem is the ongoing problem concerns the effects of deposit and withdrawal costs, and in some cases currency transaction costs as well. For certain types of deposit, and with a number of internationally based online bookmakers, these additional costs can be anywhere from 1 to 5%. Given the small profit margin, these costs can wipe out your projected profit. The best way to avoid this is to try to minimize your deposits and withdrawals.

A third problem is that some bookmakers only allow bets in a certain currency. These are mainly the small bookmakers. The best way to avoid this is to only use the big bookmakers. This is a good idea in general as you want your money to be safe.

A fourth problem is the issue of postponed sporting events. This will affect you in different ways against different sportsbooks. Some books will let the bet stand but some will cancel the bet. But you may end up only having 1 side of the bet on. You need to have a plan to deal with this.

A fifth problem is price changes. Prices on the exchanges can change very quickly, so make sure that you place any exchange bets first while the price lasts. A sixth problem is bad sportbooks. There are tonsa of sportsbooks that are in bad shape and will probably dissapear.

How much capital would I need to make it worthwhile?

In general, the more money you have the better. In order to make some decent money you need to have at least a few thousand dollars online. But in order to take advantage of the most opportunities it would be best to have $1,000 or so at 20 different sportsbooks in order to have all the odds covered. If you only have a few thousand to deal with and your plan is to keep it in an account and to deposit it at a specific sportsbook when an opportunity arises then you will run into the problem of trasnaction costs that we mentioned before.

So why doesn’t everybody use arbitrage?

Sports arbitrage is more accessible to everyday people because of the internet, but there are still barriers which stop everyone from being successful. It takes capital, time, organisation and energy to make consistent profits. It is important to develop processes that enable you to act upon opportunities immediately. Sports-arbitrage is risk-free, not effort-free. Your success depends upon your own level of commitment and hard work. Individual arbitrage prices do not last for long and there is a steep learning-curve for all newbies to climb.

How do I find arbitrages?

Find by yourself - Look at betting sites and odds comparison sites to find your own opportunities. The trick is to look for early prices that have not yet been adjusted.

From message boards - There are a number of message boards where arbhunters notify each other of available arbitrage opportunities. (ArbitrageWatch.com regularly posts available arbitrage opportunities)

From odds comparison sites - Many odds comparison sites now have special arb sections that opportunities. Most of these are done through an automatic screening process so you should double check the the prices and get to know the bookmaker too.

Sign up to an Arb Alert service - The most expensive option is to sign up to a subscription-based service that delivers notification of arb opportunities by email. A lot of these are scams so be careful.

What is an Example?

Ladbrokes offers - 2.20 for Borg and 1.72 for McEnroe
Intertops offers - 2.39 for Borg and 1.91 for McEnroe

You could back both players for a guaranteed profit by backing Borg with Ladbrokes and McEnroe with Intertops. Let us assume you want to wager $500 total. The amount to wager on each is $232.36 on Borg and $267.64 on McEnroe.

How do I convert fractional prices into decimal prices?

Divide the price’s numerator by its denominator, and add 1. For example, the decimal version of 5/4 is 2.25 (5 divided by 4, than add 1). 5/2 is 3.5, 11/4 is 3.75, 3/1 is 4.0 etc.

What is trading?

Trading is betting on the actual movement of a selection’s price. If you think that a selection’s price will fall, you would back it now and lay it later at the lower price. As long as the price moves in the direction that you have anticipated, you will be able to lock in an immediate profit. This trading process can be repeated several times within one event. You can either wait until the price moves before closing out for a profit, or you can submit an order at an exit price of your choice and wait until it is matched. You can adjust both the price and the stake of your submitted order at any time. If you are trading on the same exchange, as is usually the case, you do not have to provide funds to cover your closing bet. This is because the exchange automatically treats the potential winnings from your first bet as the stake for your closing bet. Betting exchange traders also benefit from a reduced commission liability, as commission is payable on your overall market profit, as opposed to the (larger) profit from the winning selection.

What is an example?

What is the difference between arbitrage and trading?

An arbitrage requires the concurrent availability of all prices. For example, backing a horse with a bookmaker in the belief that its price will fall on the exchanges is an example of trading. However, backing a horse with a bookmaker when it is also currently available to be layed at a lower price on an exchange is an arbitrage. In other words, an arbitrageur exploits existing price discrepancies, while a trader anticipates price movements.

Sorry but you are going to have to have A LOT of skill and enough luck to win every lottery in the US to do this.