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Dave:
If you keep your trades small, the market will likely never figure
it out from your actions. But the market will likely figure it out
in some other way.
There can be many distinct formulas or strategies that work because
they are trading the SAME market behavior. If you trade based on a
trend identified by a 15 day simple moving average of the RUT and I
trade using a 17 day exponential moving average of the VAY, we will
not get identical buy and sell signals, but we will both be trading
the same market behavior (moderate cycle trends in this example).
Over time enough people will discover the market behavior you have
found, although they may use different formulas. But since they are
trading the same behavior they and you together will gradually
change the market's behavior. Now one of those formulas may be a
little better than the others (hopefully it is the one you are
trading) and thus still give a modest profit when the others drop
down to barely better than break even.
Actually, I believe (this a belief not a proven fact) that a market
behavior will ever be completely eliminated by people trading it. I
do expect as it is traded more and more, that its profit will
decrease to a level appropriate for the amount of risk involved in
trading it. As profit drops and risk stays the same or risks, some
will stop trading it and move on to a more promising discovery. At
the same time, others will "discover" it and begin trading it. Thus
a type of dynamic equilibrium will be established roughly centered
around a modest reward/risk ratio.
That is how it looks to me.
b
--- "Dave Merrill" <dmerrill@xxxx> wrote:
but let's say you just trade your method without publicizing it, and
your trades are a small enough fraction of overall volume that their
pattern doesn't draw much conscious attention. by what mechanism
does the market as a system "realize" what you're doing and
compensate, in a way that your method's profitability disappears? on
an intuitive level I see that that should happen, I just don't get
how. for instance, if my trades are based on some complex formula
with many inputs, it seems unlikely that it will get reverse
engineered and intentionally copied, especially if I'm a pretty much
below-the-radar small trader. so how then does my individual trading
cause the market's behavior to shift?
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