Does the market really change?

[Blitzjoker]

It seems a common theme with traders that they find an edge in the market which works for a while, but then the market 'changes' and the edge disappears and starts losing money.

This seems odd to me; clearly the market is sometimes going up, sometimes going down, and sometimes going sideways; is sometimes volatile and sometimes not; but is there more to it than that? Surely an 'edge' should be able to cope with such things, as they clearly happen quite frequently and many traders say their systems have been tested over 5 or 10 years? I have never seen anyone explain specifically how the market 'changed' in some mysterious way, other than to make their edge non-profitable. It seems more likely to me that the edge never really existed, and that the trader had a promising backtest and was then 'fooled by randomness' as Taleb might say. Perhaps some of the experienced traders can throw some light on it to a rookie like me.

 

[Tradex]

I have never seen anyone explain specifically how the market 'changed' in some mysterious way,

Markets do not change, only losing traders use that excuse to "explain" their inability to make money in the long run.

 

[Bad_Badness]

It is in the details. There is a system that is back tested etc. Then there is a strategy to implement the system, then there are tactics to execute trades. People confuse the three all the time. If one has all the pieces, then they can create a stress and limits testing of the system. MOST people never make it that far. But to answer your question, any part of the whole can get "upset" by changes.

Example include changes in volatility, volume, average range etc. All these have impact on indicators, which many systems are based, let alone implementation strategies and most of all tactics to do the actual trades. A lot of time, there are very narrow windows for the edge and these are not that robust.

Give it a try. Develop a system, figure out a strategy to implement it, and develop tactics to do the trades. You will see.

OTH, people may disagree with the trifurcation above. It is an arbitrary division, but it is illustrative of the process for the purposes of this reply.

Hope that helps.

PS: Tradex is also correct on some level too. The market will be the market as it has and there are many constants that one can build a long term profitable trading career.

 

[Laissez Faire]

Markets are continously changing - yet every day is a variation of something which already happened.

 

[ValeryN]

My 5c. Take is with a grain of salt as anything you find online.

More often than not edge is there longer than many people think. That is for edges that are found on 10y+ data samples.

What typically happens is - market becomes more efficient and edge's expectancy goes down. Depending on the way how you extracted that edge (commissions structure, access to leverage, size of account, exact setup etc) - edge might become non tradable or profit potential not worth a risk anymore.

Quite often when someone says they've got an edge they mean they "feel" they have an edge but their data sample is not statistically significant. Edge discovered on a short time periods like 1-3 year or tested only during one sample of one market type will also not likely to last.

Edge also might more or less suddenly disappear due to

1. A significant market change (decimalization, too strict margin requirement, wide spread of commissionless trading). Basically that means that something that has been not widely available now is not, or you are no longer able to trade this way
2. Disappearance of the market traded
3. Regulations

I try to stick to edges that can be

1. Precisely measured
2. Have 3000+ trades in test sample
3. Tested across multiple market cycles and market types
4. Work over at least 30 years, preferably 50

Good ones I've tested going back to 1950. Some would consistently get worse every decade but are still tradable.

Less obvious but quite popular, in my opinion, reason for edge to stop working - a setup is too specific.

the less rules a setup has > the more trades it will generate > the more significant findings will be > the better chance it will keep working in the future

All the edges I use are going back to at least early 80-ies, most all the way to 50-ies. Before - I don't have data to check, but that is sufficient proof for me.

My journal

Val

 

[maxinger]

It seems a common theme with traders that they find an edge in the market which works for a while, but then the market 'changes' and the edge disappears and starts losing money.

This seems odd to me; clearly the market is sometimes going up, sometimes going down, and sometimes going sideways; is sometimes volatile and sometimes not; but is there more to it than that? Surely an 'edge' should be able to cope with such things, as they clearly happen quite frequently and many traders say their systems have been tested over 5 or 10 years? I have never seen anyone explain specifically how the market 'changed' in some mysterious way, other than to make their edge non-profitable. It seems more likely to me that the edge never really existed, and that the trader had a promising backtest and was then 'fooled by randomness' as Taleb might say. Perhaps some of the experienced traders can throw some light on it to a rookie like me.

It simply means that trader has no edge in the first place.

Some people do backtesting on the past 10 , 20 years of data.
it is useless unless you also spend thousands and thousands and thousands of hours looking at computer screens.


Market conditions / behaviour / personality / characteristic changes every now and then.
we need to recognize it, and adapt to changing market conditions.

Sometimes the market likes to climb the mountain, sometimes it likes to dive into the ocean.
Sometimes, it moves like a young stallion, sometimes it moves like an old man.
Sometimes it is happy, sometimes it is angry/mad.

 

[taowave]

Of course markets change...

How long have you been trading,and,do you soley trade cash markets,no derivatives??

Markets do not change, only losing traders use that excuse to "explain" their inability to make money in the long run.

 

[VEGASDESERT]

Any system that is coded up will eventually fail if left alone.

Hence 'the market changes'

 

[Overnight]

Behavior of the indices does change over time. But they always go up over time. Therefore your edge is time.

 

[Peter8519]

Here is another view of the market in terms of trend. For example, FDX has already been above the 50 SMA for the past 97 days. I run a screen for stocks that stay above 50 SMA from 2016 to 2020 and categorized into 1-10 days, 11-20days .. and so forth. Please look at the % distribution.