Edge deterioration?

The discussion is not about whether edges exist or not. That is off-topic, discussed many times in other threads and should belong to the class of "does TA work?" type of questions...

I define edge as something better than random, objective and quantifiable. If you don't believe in such things, fine, you have such right. But please, don't ruin the thread.. :confused:
 
Quote from Indrionas:

I have a simple idea about so called edge deterioration, I will try to explain it in this post.

It's understood that trading edges deteriorate over longer run. This is said to happen due to the fact that too much trading capital is thrown to exploit the edge (i.e. too many people start to spot and use that edge). Then the market changes (adapts), it's said it becomes "more efficient" and the edge is no longer profitable.

Here's a simple thought experiment: if edge becomes unprofitable, people exploiting it start losing money and abandon that edge (or lose everything), right? So what we get is the process where less and less trading capital is thrown to exploit the edge - an opposite of what was described in above paragraph. Following this logic, the unexploited edge should become profitable again. Is this true? Does this "edge cycle" exist in the markets?
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Yes I believe and agree with your above question. For example, and just to expand a bit, an edge developed in a given volatility, i.e. VIX, will not necessarily perform well in different VIX environment. I think therefore it's important when one develops an edge they take notes on VIX because as we have all seen VIX changed a lot of the last 6 months 12-20, back to 16 and back over 20.
 
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