When you do a lot of gambling, it is useful to know whether you are up, or down, in a market. Because individual markets can be complex, gamblers tend to talk about whether they are 'in the green' - i.e. whether they are profitable on a market, irrespective of the outcome. But this is simplistic - what you need to be able to do is to mark you positions to market, or, as I prefer to call it, generate a Net Asset Value or NAV.

This is a fairly simple concept: but understanding whether certain positions will be positive or negative to your NAV will be a core component for building trading systems. (Now, the NAV model we're building here is pretty simple - and later we will bring in more complex elements, adjusting for commission and the like - but the concept of the NAV will help you score your trading, and build better systems in the future.)

OK. Let's say there is a market for a football match: say England versus Germany. There are three possible selections (outcomes): England, Germany, and Draw. The current odds for each are:

England: 2.36

Germany: 3.05

Draw: 3.35

This is a fairly simple concept: but understanding whether certain positions will be positive or negative to your NAV will be a core component for building trading systems. (Now, the NAV model we're building here is pretty simple - and later we will bring in more complex elements, adjusting for commission and the like - but the concept of the NAV will help you score your trading, and build better systems in the future.)

OK. Let's say there is a market for a football match: say England versus Germany. There are three possible selections (outcomes): England, Germany, and Draw. The current odds for each are:

England: 2.36

Germany: 3.05

Draw: 3.35

And let us assume that - in the event of an England win, we make £23; if Germany wins, we lose £15, and if it's a draw we lose £3. So - are we up or done on this market? Well, the simplistic answer is - we're up if England wins, and down otherwise! But that's not the right way to look at this. We need to convert those odds into percentage probabilities, and then weight the outcomes.

Each odd is - in effect - a measure of probability. If the odds on England are 2.36, that means the (unadjusted) probability is 42.4%. (We get the probability by dividing 1 by the decimal odds. So England is 1 / 2.36 = 0.424 = 42.4%.) So the probabilities the odds are telling us are:

England: 42.4%

Germany: 32.8%

Draw: 29.9%

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Total: 105.0%

Now, obviously, the true probabilities have to add up to 100% - so we need to divide every probibility by 105% to get a total that adds up to 100%. This tells us exactly what probabilities the gambling markets expect:

England: 40.4%

Germany: 31.2%

Draw: 28.4%

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Total: 100.0%

To see our expected outcomes, we need to multiply those percentages by the amounts we win on each outcome:

England: 40.4% * £23 = £9.28

Germany: 31.2% * £-15 = £-4.68

Draw: 28.4% * £-3 = £-0.85

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NAV: £3.74

If we have a positive NAV on a market, we have a positive likely outcome. Of course, things get a little more complex with the concepts of balanced books, and the like. But if you want to 'score' your positions now, you have no better tool in your armoury than the NAV.

In our next post, we'll draw together NAVs with the ability to get prices out of Betfair, so you'll be able to see - on a market by market basis - where you're winning, and where you're losing.