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The comment referred to a mechanical system so the
"WHY" is a nonissue.
----- Original Message -----
Sent: June 07, 2009 9:20 AM
Subject: [amibroker] Re: Do all trading
systems stop working? - Howard Bandy's book
>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 amibroker@xxxxxxxxxxxxxxx,
"wavemechanic" <fimdot@xxx> 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:
amibroker@xxxxxxxxxxxxxxx
> 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@> 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
> >>>>>
>
>>>>
> >>>
>
>>>
> >
>
>
> >
> >
>
>
> >
> >
------------------------------------
>
>
> > **** IMPORTANT PLEASE READ
****
> > This group is for the discussion between users
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> > This is *NOT* technical support
channel.
> >
> > TO GET TECHNICAL
SUPPORT send an e-mail directly to
> > SUPPORT {at}
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> >
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SUGGESTIONS please use FEEDBACK CENTER at
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>
> (submissions sent via other channels won't be
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> >
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ANNOUNCEMENTS and other news always check DEVLOG:
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>
>
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>
>
> >
> >
>
>
>
> ------------------------------------
>
> **** 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}
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>
> TO SUBMIT SUGGESTIONS please use
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> 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
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------------------------------------
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This is *NOT* technical support channel.
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