>Extraordinary claims require extraordinary evidence". Where is the published >evidence?
There will be no proof that "trading the edge erodes the edge" forthcoming because there is no central record of WHY any recorded market transaction is made. --- In [email protected], "wavemechanic" <fim...@...> wrote: > > Without getting into endless mental gymnastics, consider a simple mechanical > system - crossing of moving averages. This system has been known and used > for "ages". How well does it work? Perhaps as well as it did on day one or > perhaps not. In either case, a critical statistical analysis for a > reasonable number of stocks over various test periods is needed to prove or > disprove. Has this been done? As Sagan famously said, "Extraordinary claims > require extraordinary evidence". Where is the published evidence? Absent > such evidence, everybody will do what works, or feels OK, or etc. and to a > first approximation no amount of discussion will change a single mind. > > Bill > ----- Original Message ----- > From: Dennis Brown > To: [email protected] > Sent: June 05, 2009 11:02 PM > Subject: Re: [amibroker] Re: Do all trading systems stop working? - Howard > Bandy's book > > > Yuki, > > You are spot on. I know that traders who have consistent winning > strategies are tracked by their brokers, and in some cases the brokers > shadow their trades. They do not even have to know their algorithm, > just place the same orders in a shadow account. All brokerages that I > know of have the ability to make these shadow accounts. > > However, that does not mean that all will do it. Some brokers pride > themselves in not taking the other side of their customers trades, or > doing anything that could be considered a conflict of interest. They > are known as fill and bill brokers. > > One trader I know has been contacted regularly by his brokerage house, > asking for his methods. Many trading houses look for consistent > winners and offer to let them trade the house money for 50% of the > profits -- and the trader is not responsible for the loses --except he > would lose his job. > > However, I believe the biggest threat to the "edge" will come from > machines that can out pattern recognize, out compute odds, and run > emotion free. The machines are getting there, and I don't want to > take the other side of their trades when they do. > > Also any good algorithm that becomes public will be put into a > machine, and as long as it works, it will drain the profits out of the > trade. It does not even require a "Big Boy", just a bunch of little > traders will kill it since the machine trading will be additive across > machines. As long as the machine is making money, who would unplug it? > > In the mean time, trade on. Life is short, and we might not live to > see that day anyway. > > Best regards, > Dennis > > > On Jun 5, 2009, at 10:16 PM, Yuki Taga 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 > >>>>> > >>>> > >>> > >>> > > > > > > > > > > > > > > ------------------------------------ > > > > **** IMPORTANT PLEASE READ **** > > This group is for the discussion between users only. > > This is *NOT* technical support channel. > > > > TO GET TECHNICAL SUPPORT send an e-mail directly to > > SUPPORT {at} amibroker.com > > > > TO SUBMIT SUGGESTIONS please use FEEDBACK CENTER at > > http://www.amibroker.com/feedback/ > > (submissions sent via other channels won't be considered) > > > > For NEW RELEASE ANNOUNCEMENTS and other news always check DEVLOG: > > http://www.amibroker.com/devlog/ > > > > Yahoo! Groups Links > > > > > > > > > > ------------------------------------ > > **** IMPORTANT PLEASE READ **** > This group is for the discussion between users only. > This is *NOT* technical support channel. > > TO GET TECHNICAL SUPPORT send an e-mail directly to > SUPPORT {at} amibroker.com > > TO SUBMIT SUGGESTIONS please use FEEDBACK CENTER at > http://www.amibroker.com/feedback/ > (submissions sent via other channels won't be considered) > > For NEW RELEASE ANNOUNCEMENTS and other news always check DEVLOG: > http://www.amibroker.com/devlog/ > > Yahoo! Groups Links >
