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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 -----
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 amibroker@xxxxxxxxxxxxxxx <mailto:amibroker
>>>
%40yahoogroups.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@xxxxxxxxxxxxxxx
>>>
<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
>>>>>
>>>>
>>>
>>>
>
>
>
>
>
>
>
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This is *NOT* technical support channel.
TO GET TECHNICAL SUPPORT send an e-mail directly to
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