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RE: [amibroker] Re: Do all trading systems stop working? - Howard Bandy's book



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Hi,

 

                I opened a trading account with a French bank and they openly told me they would piggy back my good trades (one fellow there, some kind of a friend). Well, only left cash there and went back with a american bank.

 

 

Jean Paul  

 

From: amibroker@xxxxxxxxxxxxxxx [mailto:amibroker@xxxxxxxxxxxxxxx] On Behalf Of sidhartha70
Sent: 06/06/2009 4:00 PM
To: amibroker@xxxxxxxxxxxxxxx
Subject: [amibroker] Re: Do all trading systems stop working? - Howard Bandy's book

 




Keith, front running would assume they weren't offering you DMA (direct market access) - my broker does... and that they therefore knew what your trades were before you did...

I prefer the idea of me front running them...

I know a guy who hasn't lost money day trading in nearly 2 years now... he made just over $1m USD last year... if his broker is eroding his edge by front running, he hasn't seen it... and trading is his life... he'd notice.

--- In amibroker@xxxxxxxxxxxxxxx, Keith McCombs <kmccombs@xxx> wrote:
>
> "(by entering trades in the same direction after you)"
> Why wait until 'after'. The only thing that prevents them from "front
> running" are government regulations, which are enforced, without exception*.
>
> *note: sarcasm intentional
>
> sidhartha70 wrote:
> >
> >
> > I have to say that I find this idea that brokers will work out your
> > strategy slightly fanciful.
> >
> > I agree & accept that if you are a consistent winner that brokerages
> > might try to shadow your trades... that's great as far as I'm
> > concerned because they simply add to your own alpha (by entering
> > trades in the same direction after you) not erode it.
> >
> > However, the idea that brokers are smart enough to even begin to
> > untangle a complex profitable strategy simply by looking at the trades
> > is pure imagination in my opinion.
> >
> > Again, I talk as a trader who trades a defined system on a
> > discretionary basis... including contingency plans for all my trades,
> > chase plans for late entries... I often reverse a position if I'm
> > wrong etc...etc...
> >
> > I would wager a bunch of smart people could look at my trades for a
> > very long period of time and make little sense of them ...
> >
> > --- In amibroker@xxxxxxxxxxxxxxx <mailto:amibroker%40yahoogroups.com>,
> > "huanyanlu" <huanyan2000@> wrote:
> > >
> > > Yiki, tashikani soodesu. You have made a valid point, as the profit
> > have to be made somewhere and those accounts would be subject to scrutiny.
> > >
> > > Huanyan
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx
> > <mailto:amibroker%40yahoogroups.com>, Yuki Taga <yukitaga@> wrote:
> > > >
> > > > Huanyan,
> > > >
> > > > Splitting the trading probably won't help you. If you could identify
> > > > the weakest trades (the ones you would, perhaps, direct to brokerage
> > > > B), you would eliminate them completely. So the results over time of
> > > > split trades should approximate your overall results. And of course
> > > > if you shunt only the bad trades to broker B, then the results at
> > > > broker A are going to be even more spectacular. Brokerage A is then
> > > > going to have even more incentive to examine your play.
> > > >
> > > > There would seem to be no way to disguise your play, because you are
> > > > not a market specialist. ^_^
> > > >
> > > > Remember, it's not the amount you win (splitting would affect this
> > > > number, but it's meaningless), but the consistency and the
> > > > methodology and the risk metrics, that will draw attention.
> > > >
> > > > One way to disguise the system itself would be to occasionally throw
> > > > in the deliberate "anti-system" trade -- a throwaway trade made on an
> > > > absolutely contrary-to-the-system basis. That might throw off a
> > > > search for your system. (Perversely, it might also win.) ^_^ But
> > > > unless you did it often enough to influence your real returns (which
> > > > you would not do, because then your returns would be negatively
> > > > affected), then it would have no value in terms of stopping someone
> > > > from shadowing you.
> > > >
> > > > I've never worried about brokers taking the other side of my trades.
> > > > I'd end up owning the companies if they did that long enough. ^_^
> > > > But just as I assume that they look at good traders, I would assume
> > > > that they look at clueless traders (although clueless traders tend to
> > > > run out of money, so they would be limited to looking at clueless
> > > > traders that seem to have a wellspring of money somewhere to
> > > > replenish their accounts). I wouldn't mind taking the other side of
> > > > any trade made by someone with a demonstrated capacity for being
> > > > wrong.
> > > >
> > > > But I think the practices are almost impossible to stop. Brokers are
> > > > often members of exchanges (if not always), and they routinely
> > > > generate data for the exchanges (margin long outstanding and margin
> > > > short, for example). So they have at least some valid reasons for
> > > > analyzing data.
> > > >
> > > > And as I say, human beings, generally, are not going to pass up any
> > > > profit opportunities. If you are trading at *MY* firm, and you are
> > > > consistently making a pile of money, with risk metrics that I find
> > > > acceptable, I'm going to have a look at your action. A very close
> > > > look. Think of me as the camera behind the overhead mirror at
> > > > Caesar's Palace. ^_^
> > > >
> > > > Yuki
> > > >
> > > > Saturday, June 6, 2009, 12:26:07 PM, you wrote:
> > > >
> > > > h> Interesting idea, Yuki.
> > > >
> > > > h> Can someone verify if it is a common practice for brokers to
> > > > h> investigate the performance of its clients ( of courese internally
> > > > h> and act in low profile ) and then try to figure out the
> > > > h> methodology of the successful clients ?
> > > >
> > > > h> If it is the truth, then is it advisable to split the trading
> > > > h> operation among accounts in different brokers ?
> > > >
> > > >
> > > > h> Huanyan
> > > >
> > > >
> > > >
> > > > h> --- In amibroker@xxxxxxxxxxxxxxx
> > <mailto:amibroker%40yahoogroups.com>, Yuki Taga <yukitaga@> 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>
> > <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>
> > > > >> >> <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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