|
PureBytes Links
Trading Reference Links
|
You have three devils against you. We all talk about the first two,
but permit me to really harp on the third:
1) A random series that pretends to be non-random. You can fight this
by only accepting systems that are robust across many different markets,
as well as performing sizable forward tests.
Equity curve-fitting is a problem because a random series can
masquerade as a sexy equity curve. Then, for a number of months of
forward testing, it could even perform a random walk that stays within the standard error bands,
giving the impression that the system is true.
It's important to forward-test systems to provide confidence that the
strategy is in fact reflecting something non-random about the markets.
The problem is that the forward-test itself is statistically insignificant.
So you decide to trade it anyway, telling yourself that you will stop
or lighten up if the equity curve crashes through the standard error.
You watch it and see what it does next, and compare this movement with
the movement in the past.
2) You have a system that works, passes the test above, and has worked
for some time. Then the market changes because times are changing.
Your trading has to change too. The good news is that when the market
begins to play different tunes, it combines it with the old ones, to
give you a chance to change before you are wiped out.
3) You have a system that works, passes the test above, and has worked
for some time. Then the market changes because it is responding to
YOUR system. This is why I stay clear away from any strategy that is
talked about. I don't understand why people think that you can just grab a
publicized system, start trading it, and expect an easy road to
riches.
Added to this, don't fall for the fallacy that your trades are anonymous. I
highly doubt it. It's all too tempting for the exchanges/brokers to process
data that contains not only what and when markets are traded, but WHO
is trading what and when. It doesn't take much to discover who is
making a lot of money. If they can't figure out what you are doing
directly, they can at least run computer algorithms that
reverse-engineer your trading patterns. This opens the door for
front-running, intraday price running, and fading opportunities.
Indeed, there are other successful people, too.
Their systems may be different, but perhaps they are the same because
we all hear the same stuff. Either way, the
people who know WHO is doing what and how successful he is, have an
enormous advantage.
Jessie Livermore knew this very well, and had to go to great lengths to deal with this problem.
He had several different accounts under several different aliases
executing only parts of his grand plan. Yes, the market was a small
town back then, but cheap powerful computers and well-paid
programmers have changed the market community, and have made it small
town once again.
This concern may be overkill for the trader who makes a decent living,
verses someone who discovered something more. But be aware that your
systems may be very similar to the ones several other traders use. The sum of 100
successful traders doing the same thing = a crowd that makes a lot of
noise. So the system becomes the Big Shot that insiders notice.
This is a tough game. Mechanical systems must be adaptive and clever.
If what you have is hot as hell, cloak yourself and your system.
|