Interesting idea, Yuki. Can someone verify if it is a common practice for brokers to investigate the performance of its clients ( of courese internally and act in low profile ) and then try to figure out the methodology of the successful clients ?
If it is the truth, then is it advisable to split the trading operation among accounts in different brokers ? Huanyan --- In [email protected], Yuki Taga <yukit...@...> wrote: > > KM> Why would it be discovered? > > I would be inclined to believe that any system that is employed for > any reasonably lengthy period of time will be discovered. I think > this is particularly true now in the data processing age. Human > beings are, after all, human beings. And behind all the machines, > there are human beings. You can't trade without exposing yourself to > the machines (which "remember" all your trades forever) and, very > importantly, to the people who have access to the machines, or who > control the people with access. > > I don't know where this might be illegal or legal, and I'm sure it is > in some places and maybe isn't in others, but if I was a ranking > officer in a brokerage firm, you can be absolutely sure that I would > know exactly who my most profitable clients were over time -- using a > basket of metrics to look for outstanding performance that fell > within allowable risk parameters. And you can also be sure that I > would spend no small amount of time and effort trying to ascertain > how any sustained profitability that was in the bounds of my metrics > was being generated. I'd be running the data periodically. Need I > say more? > > If you are siphoning money out of the market on a consistent basis, > and doing it better than almost anyone else (basis simple RoR, better > risk-adjusted numbers, some the combination of the two, or whatever > measures you happen to be looking for), it is going to be noticed. > There is almost no way to get around this. Your identity can be > cloaked without too much trouble, but cloaking your play is much more > difficult -- because you have to play. Conceivably, you could break > your play up among several sets of machines, but if you are > successful enough I think your play is going to be detected. > > If you are small potatoes, you have less of a problem I'm sure. > Almost no problem. But if you have a system good enough to interest > someone else, you aren't going to remain small potatoes very long. > And in the meantime, you are going to be putting up some trade > statistics that should attract someone's attention. Let me change > that to *will* attract someone's attention. > > It's called the smell of money. And one of humanity's most powerful > olfactory capabilities is detecting that odor. > > Yuki > > Saturday, June 6, 2009, 10:32:32 AM, you wrote: > > KM> The statement, "they will be discovered and traded", contains two > KM> assumptions, which I find difficult to accept. > > KM> First, addressed by Brian below, it will be discovered only if it is > KM> used to an extreme extent. The system may, for example, just trade > KM> relatively small lots in large and universally held equities. One could > KM> possibly make millions from futures and forex without effecting the > KM> markets one iota. Why would it be discovered? > > KM> Second, even if it were discovered and even became widely publicized, it > KM> still might not be traded sufficiently by others to have any effect on > KM> its success. The system might, for example, require considerable > KM> patience by the trader, so much so that only a very small number of > KM> traders would be willing to use it. Or it could be based on some theory > KM> that all but a few would reject, despite its effectiveness. > > KM> It's believed by many, including yours truly, the the most effective, > KM> low risk/reward, way to make money from the stock markets, is to write > KM> books and give lectures about how to make money in the stock market. > KM> This system has been going on for years, is well known, and so far > KM> appears to be quite profitable. I doubt that it will ever stop working. > > KM> -- Keith > > > KM> brian_z111 wrote: > >> > >> > >> <snip> I find the statement that all trading systems stop working > >> eventually to be too vague.<snip> > >> > >> Howard has provided supportive arguments, to this theory, at various > >> times, and we can not accuse Howard of being vague or equivocating > >> when it comes to trading (I thank him for that). > >> > >> As I recall the basis of his view is: > >> > >> - all systems will fail eventually > >> - they will be discovered and traded > >> - trading the edge erodes the edge > >> > >> By 'erodes the edge' Howard means that if, for example, I am trading a > >> system and buy, at the entry signal of 100.00,, and sell on the exit > >> signal of 103.00, I have made a profit of 3%. > >> > >> If a lot of people start trading the same system (same market/ > >> timeframe etc) then the second person in will have to buy at, say > >> 100.01 and sell at 102.99 (because my action in buying/selling before > >> them moved the bid/ask (theoretically trader 2 ends up with a profit > >> of 2.98% , calculated on a commission free basis and so on, down the > >> food chain). > >> > >> According to this theory, the efficiency of the trade has been > >> diminished i.e. what was a 3% trade has been reduced to a <3% trade(on > >> average) due to other traders piling in to the trade. > >> > >> My critique of that argument is: > >> > >> - the reason why any trade (tick) is made (appears on the tape) is > >> unknown to us (except for our own trade) > >> - all ticks, other than those that are trading our system, are noise > >> (to us) and therefore random > >> - ticks associated with our trade, that are not placed by us, will be > >> dispersed in time, (due to the various trading time delays experienced > >> by individual traders).... so they will be interposed by random ticks > >> - in a pure market (no commissions and no manipulation of the trades > >> by insiders) there is a 50/50 chance that my tick (if I take the > >> market price) will be less than the midprice of the bid/ask when the > >> signal was generated at the exchange. > >> - my price could move away from the original midprice substantially, > >> in a fast market, but no one can know the reason for the fast trading > >> or attribute it to our system (my system only produces a buy signal > >> once every 2-3 days on average - fast markets happen all of the time, > >> when I am not trading my system, and presumably slippage is still > >> occurring, in other transactions, so the evidence is against the fact > >> that my system is the cause of slippage and fast markets). > >> > >> The exception to that is if a 'player' with a big account, relative to > >> the liquidity of the instrument, is also playing the same system, at > >> the same time, in the same market/instrument/timeframe. > >> > >> So the question is: > >> > >> - to what extent are 'big players' trading a system, in a highly > >> liquid instrument, with enough clout to move the market? > >> > >> - IF big players are system trading what type of system would they be > >> likely to play and what% of the total funds they are controlling are > >> they likely to risk on any single system? > >> > >> - are they likely to play with large enough sums of money to erode the > >> efficiency of the system they are trading? > >> > >> - IF they are playing a system, with large amounts of money, is it > >> likely that their system would involve entering all of that money at > >> the same time i.e. they would trade in such a way that they would make > >> an intraday splash OR are they more likely to trade systematically > >> over longer timeframes (that might be a reason that intraday sytems > >> don't get eroded as often as EOD systems ... if that claim, made by > >> some, is true). > >> - IF big players do trade in such a way that they are 'moving the > >> market' do you think they would be so naive that they are unaware of > >> this and haven't factored that in to their strategy..... if 'moving > >> the market' is negative to their strategy would they do that ...if > >> 'moving the market' is positive to their strategy are they more likely > >> to implement that strategy in illiquid instruments/small timeframes OR > >> the reverse? > >> > >> But all of that is just a nice theory. > >> > >> The best argument against any theory is evidence. > >> > >> Some forum members have listed some example trading systems that have > >> been published for decades AND they are still going strong AND their > >> performance has not 'faded in and out'. > >> > >> Anyone who wants to defend the 'trading the edge erodes the edge' > >> argument now needs to prove that these systems were never published > >> AND that after they were published they ceased to work. > >> > >> That won't be an easy task because Samantha's unequivocal example (a > >> 10 bar SMA on monthly data) is based on a trading idea (MA crossovers) > >> that has been around forever (Tomasz even ships AB with a example code > >> in his formula folder and the manual) and there are published studies > >> on the net (rigorous studies at that) that are relatively current. > >> > >> However, the more imporanat question seems to be, if these systems did > >> not fail, due to being published and/or traded, why didn't they? > >> > >> > >> --- In [email protected] <mailto:amibroker%40yahoogroups.com>, > >> "Leading Edge Systems" <rdcpa@> wrote: > >> > > >> > I am new to Amibroker and I have been using Howard's which I find to > >> be excellent, as a guide to learing AB. > >> > > >> > I find the statement that all trading systems stop working > >> eventually to be too vague. First "stop working" is a relative term > >> and would have a different meaning for each of us. Also I think > >> inefficiencies can come and go in cycles based on the popularity of a > >> particular type of trading. Once an inefficiency has been traded away > >> due to over-popularity, it probably will go out of fashion and then > >> become an inefficiency again some time in the future. All this depends > >> on the specifics of what we mean by "stop working" and "a system". > >> > > >> > Rich > >> > > >> > > >> > > >> > --- In [email protected] > >> <mailto:amibroker%40yahoogroups.com>, "samu_trading" <samu_trading@> > >> wrote: > >> > > > >> > > All, > >> > > > >> > > In his really good book Quantitative Trading Systems, Howard > >> states that all trading systems will stop working forever at some > >> point (because the inefficiency in the market they exploit will be > >> killed by everybody jumping on board). > >> > > > >> > > On the other hand you have momentum / ROC based systems working > >> forever now, same for trend following MA crossover systems like The > >> one propagated by Mebane Faber. Momentum and MA rossover > >> trendfollowing does seem to work "forever". > >> > > > >> > > Any comments from the gurus here? > >> > > > >> > > Thanks, Samantha > >> > > > >> > > >> > >> >
