<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 amibroker@xxxxxxxxxps.com,
"Leading Edge Systems" <rdcpa@xxx> 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 amibroker@xxxxxxxxxps.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
> >
>