Quote from grainmerchant:
I think simple is better. Here is a simple entry filter for daytraders.
There is no easy answer.
There are plenty of common sense, simple strategies, enhancements, and publicly available systems that are net profitable but perhaps have undesirable risk, deep drawdowns, or only work in certain markets.
-> Easy to find, high risk
There are simple strategies that can be successfully improved through simple methods such as performance monitoring, stops, filters, hedging, inter-market diversification or combined with other systems or fundamental analysis.
-> Harder to find, less risk
There are sophisticated strategies that fail because they are too complex, âcurve fitâ past market action and canât generalize future action, or lead to excessive volatility in returns.
-> Easy to find, high risk.
There are sophisticated strategies that succeed because they are internally diversified, âlateralâ in design, either profiting from multiple market inefficiencies/patterns or a few patterns well conserved over time, but hidden nonetheless. Adaptive systems can work too as long as the adaptive elements are lateral, robust and well monitored and controlled.
-> Very hard to find, lower risk.
There is everything in between these extremes. Millions of traders, investors and intelligent agents (adaptive systems) are searching for low risk systems and strategies (mechanical or discretionary). The more a strategy becomes profitable and well known, the more it is traded, the more itâs execution prices worsen. Alternatively, more sophisticated participants may catch on to a popular system and recognize that the ones trading it are risk adverse, then step into the markets to fade it, purposely causing others to hit their stops or get squeezed, causing predictable breakouts or mean reversions. Again, a popular strategy becomes less profitable. Sometimes there are cycles where the markets move from one phase to another. Periods of uncertainty, tight ranges and stagnation alternate with periods of trending, greed and fear. Often there is a continual evolution of what works and doesnât. In my experience a low risk system requires extensive study of markets, either in real-time or through back testing and forward testing systems. One needs to find a novel strategy not already being traded and thus not subject to being overloaded or faded. Real money trading is important too. However itâs also possible to learn about markets and develop a system through papertrading alone, as long as one properly accounts for slippage, or have traded enough to understand size, liquidity and slippage factors.
