Great thread, indeed.
Thank you momo for emphasizing axe´s reply;
helped me understand a few more things previously buried in my mind. Let me explain:
Why do most mechanical systems fail in the trading environment?
In my opinion, this question can easily be answered from an evolutionary point of view. A few years ago, an article from Alan Farley´s site started intriguing me - but it took more than 3 years before i fully understood all it´s implications ( btw here it is
http://www.hardrightedge.com/wizard/ss1.htm )
Mechanical systems would be a great solution for complex systems that are not influenced by it´s actors; the best example for this is meteorolgy. Clouds, thunderstorms and tornadoes don´t care about the outcome. Both the weather and the trading environment are so called complex systems, and although both share the fact of uncertain predictability, there is one distinction in the equation that totally separates both. It´s the strategic element.
Just like in nature, the players themselves influence the macroscopic outcome on a microscopic level. Just like in nature, the trading landscape offers plenty so called eco-niches, better known to us as inefficiencies.
When, for example, rabbits were introduced to Australia a few hundred years ago for hunting purposes, nobody dared to predict that they would be such a such a succesful species that they would destroy entire landscapes and therefore the dietary basis for many other species.
Same goes for cobras in India; they were imported from Africa with the aim to eat up all the rats that spread all along the subcontinent, starting from the european merchant´s ships. Eating rats was basically all they did in their country of origin, so, who could have predicted that they would instead eat all the domestic species in India?
Another example of an evolutionary advantage is the emergence of hedge funds in the mid- to late 90s.
While the evolutionary most successful strategy was the simple buy and hold approach in most of the past 20 years, this strategy was doomed to fail in trendless or bearish market environment. Just like the dinosaurs, the population of long-only funds started to decline slowly but steadily.
Strategies in trading can becom obsolete just like strategies in nature: the best example for this is the species of the turtle traders. In the beginning, buying a new break-out was the name of the game. It didn´t even take a tradestation to make a killing in the early 80s by following this. But as time passed by, more and more people discovered this niche in the market, and so they encountered the fate that every overpopulated species is confronted with sooner or later. They became the prey of a new mutated species, the turtle soup traders: those did exactly the opposite of the former, namely they sold every new break out - and many of them made a killing.
There is no constant formula for success, but there are several simple strategies that can still be successful, for the same strategic reasons that secured the dinosaurs known as crocodiles survival or scorpions (scorpions survived the last 400 Million years without major changes).
Learn basic strategies and, above all, reach mastery in them!
Don´t become distinct in your actions, become distinct in the quality of your actions (= risk- and money management).
Just like Jesse Livermore wrote, "the business of speculation is so old, that there is nothing new to be found in it".
Just like in biology, we can distinct between so-called r-strategists and k-strategists. R-Strategists are species that just bear few children and take care of them so that their chances of survival and future reproduction is very higt. Humans are an example for such a species.
The opposite is the K-Strategists; these are species that produce many potential children, but only a few of them succeed in reaching the age of future reproduction. Mushrooms are a great example for such a species; they spread billions of spores through the air, but only a few make it.
Here´s a break-through discovery by Doyne Farmer himself, as written in Hagstroms "Investing - The Last Liberal Art":
Biological Ecology Vs. Financial Ecology
Species
Vs. Trading strategy
Individual organism
Vs. Trader
Genotype (genetic constitution)
Vs. Functional representation of strategy
Phenotype (observable appearence)
Vs. Actions of the strategy (buying and selling)
Population
Vs. Capital
External Environment
Vs. Price and other informational inputs
Selection
Vs. Capital allocation
Mutation and recombination
Vs. Creation of new strategies
Regards from Hamburg
Denis
Quote from momotrdr:
Axe-
You've stated more truth than you even realize.
If there was a STAR ratings system on ET this one
would be a 5 on a 5 Scale, for those wanting a bit
of advice to chew on....
I guess all I have to say is..you buried the hatchet on
this post...no pun intended.
-momo
