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On the
other hand, why wouldn't the fact that the more people jump onto the behavior
cause that behavior to be more exaggerated and thereby make it more and more
profitable?
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<FONT
face=Tahoma size=2>-----Original Message-----From: b519b
[mailto:b519b@xxxxxxxxx] Sent: Friday, October 17, 2003 2:07
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] Will
systems degrade? (was Optimization)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?Send
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