Profitable Strategies being impacted by the #'s using them.

[rtharp]

This came up on the Opening Orders Thread but it really does deserve a thread of it's own in my opinion.

I know a few arbitrage systems that do really well. I've learned using some of them how to easily make $2000 per day with them with very little risk. I noticed though soon after teaching a few others what I was doing that my profits were starting to dwindle more and more. Now arbitrage is the true king of the more who know about it the less the opportunity.

This got me thinking though about other trading strategies though after seeing what a difference just a few traders made.

I know on Opening Orders I can sometimes trade a thinner issue than a Dow Component. There are only so many shares at the next bid or offer. When I am stopping out I would prefer that I could get out where I want to than have 200 traders run for the same door making my loss of a few cents turn into a loss of a lot of cents. Than there is also the other side with the envelope. The more shares and the thicker the envelops surrounding the stocks the less there is an order imbalance meaning the less probability of a large gap happening.



Would anyone care to comment on this topic??
It could make for an interesting discussion. I still share some strategies but have learned to be very general and not get into as many specifics as possible unless it is a trader who is in my office who I have an incentive for them to do well. I mean for each time I buy or sell there is always another side to the trade. If the balance gets shifted too much in one direction than the strategy no longer works.

Robert Tharp

 

[darkhorse]

Originally posted by rtharp


Would anyone care to comment on this topic??
It could make for an interesting discussion. I still share some strategies but have learned to be very general and not get into as many specifics as possible unless it is a trader who is in my office who I have an incentive for them to do well. I mean for each time I buy or sell there is always another side to the trade. If the balance gets shifted too much in one direction than the strategy no longer works.

Robert Tharp

I outlined my general methodology on this board not long ago, in another thread, and then felt a little paranoid about it shortly afterward.

What I do and the way I do it cannot be effectively replicated by someone else for a number of reasons- and I'm not worried about copycats because the guys paying my bills are by and large the behemoths and the end of day decision makers who wait until the next day's opening to make a move- but still, its normal to feel a little cautious about spilling the beans on your bread and butter, even if logic tells you your edge can't be competed away.

I think arbitrage strategies are more vulnerable to being exploited away because the margin of profit is so thin and because the opportunity is usually so pinpointed.

Maybe its safe to say that the more narrow or specific your trading thesis is, the more vulnerable it is to exploitation because if it is specific then it is limited to one market/timeframe/activity etc.

Whereas the more broad and nonspecific your general thesis, the harder it is to copycat or eradicate through overapplication.

For example, my method is based on broad truths that are structurally permanent and will never change. As long as the elephants stay as big as they are and general price mechanics stay the same, I will be able to use speed and timing to profit from the elephants' lumbering entries and exits.

Then there is also the relationship between predator and prey. Your group is always taking money from another group- in a sense, the predators depend on a thriving population of prey. If the leopards are living off the antelope and the antelope population drops sharply, the weaker leopards are going to starve to death.

 

[rtharp]

Originally posted by nylord1
Not trying to be sarcastic or offensive, but what is the point of posting on this website if you don't want to discuss ideas and thoughts with others? It wasn't that long ago when you yourself started a new thread entitled "don's Trading Strategies" to have him DISCUSS AND SHARE his trading strategies with everyone...........Besides, just like Don said, not everyone is capable of using these strategies anyway.........Also, this strategy has been around for awhile anyway (just like Don mentioned) and has been written about in a few books and articles I have read. If you don't want to give the farm away on your own paticular technique, thats fine, but I am assuming that most people that post on this website are on this site for the purpose of learning, communicating, and sharing. Otherwise, why bother visiting the site other than to post "up 3000 today" or "down 7000"?

-Not attacking, just my opinion-

I don't take this as an attack. especially when you say it a few times (which usually says you feel like it is but are trying to soften the blow). I am putting my reply on this thread though instead of the Opening Orders thread.

Actually I still believe in sharing. This comes from a spiritual thing of mine that I've noticed I get back 10 fold whatever I give.

I still give on this site and I'll let others vote if they deem my posts have merit. There are many parts to trading other than just the strategies which I comment on. If you were to reread through the majority of my posts you will see I've have shared quite a lot. (over 900 posts and they have a wide variety of topics I will comment on). You can pretty much pick my brain on some of the trading things I do with going through all my posts. (I see your # of posts is in the lower 2 digits so I'm assuming you are newer here) please excuse me though if I'm wrong.

I just want to find out others opinons on this subject. I have seen records of when a majority of another firm started to copy what the top 20% of the traders at the firm were doing. The top 20% income dropped significantly.

I thought that maybe a discussion about this could be rather interesting and might open up a few possibilites.

Robert Tharp

 

[rtharp]

Originally posted by darkhorse


For example, my method is based on broad truths that are structurally permanent and will never change. As long as the elephants stay as big as they are and general price mechanics stay the same, I will be able to use speed and timing to profit from the elephants' lumbering entries and exits.

Then there is also the relationship between predator and prey. Your group is always taking money from another group- in a sense, the predators depend on a thriving population of prey. If the leopards are living off the antelope and the antelope population drops sharply, the weaker leopards are going to starve to death.

Thanks Darkhorse.

I like that second part of the quote above.

It is actually one of the things that brought me originally into stocks is the elephants in the stock market are rather inefficient compared to futures. They tend to hold very long term time frames and almost not use stops. I saw when I traded futures that I was usually the prey as CTA's, companies that were hedging and a few others were able to thrive off me.

I agree completely about this the more I think about it. The broader the strokes the less likely it will affect the long term picture. I came from being a long term position trader who used breakout's as an entry. I would have stops that were further away than 25%. What I did and other meant little to me on my picture.

Now that I daytrade intensely I rely on a lot of other bids and offers to keep my losses small and let my profits run. I've noticed some of the antelope are starting to disappear so I guess it got me thinking.

Robert

 

[vikana]

I think that there is merit a strategy being diluted when it becomes "well known". E.g after O'Shaughnessy's published his what works on wall street in the mid 90s, many of his best strategies lost their edge. So did the performance of the funds under his management.

I don't know about the opening plays. I've played gap openings for years, and I haven't really seen any change. Never uses the FV strategy as presented here, so maybe that particular strategy has deteriorated.

 

[nylord1]

Robert,

Not questioning your contributions to the site (your posts are quite helpful and valuable) It just seemed (from the post I was commenting about) that you were sour on the whole idea about sharing ideas and not just strategies. My whole point was that other people who read that particular post should not be discouraged in trading ideas and comments. Like I said, if people don't want to give away the exact details of their money making strategies, thats fine with me....but I think sharing general information and methodologies like darkhorse mentioned is beneficial and allows all traders here to grow.

By the way, I wasn't trying to soften any blow because I wasn't throwing a punch in the first place. I recognize the contributions you have made here and appreciate them as a fellow reader. I was just voicing my opinion.

 

[candletrader]

Interesting thread Robert... I would like to comment initially in a manner that may seem to be circumventing the issue, but I do believe the following has merit... irrespective of the methodological approach, I feel that what differentiates a winner from a loser over the long-run is a healthy dose of risk aversion and a compliance with risk parameters at all times... even if the efficacy of a certain strategy degenerates over time (particularly so when multiple participants start employing an arbitrage strategy with small potential profits), it is sound risk management which will create the long-term winner...

Now obviously if the posited arbitrage system employed becomes negative expectancy as a result of a preponderance of participants who, so to speak, "arbitrage away" the viability of arbitrage, then positive expectancy could conceivably be found on the other side of the masses... the example that springs to mind (not an example based on arbitrage, but on vanilla trend trading) is the Turtle trading strategy popularised by Richard Dennis... as a result of the multiple false breakouts that occured, the Turtle Soup plus One strategy was devised to explicitly exploit the masses...

 

[stock777]

The problem you address here is well known at any racetrack. The Parimutuel system lets the bettors determine the odds on each entrant by the relative amount of money wagered.

If you have a winning system, and sell, tell, or otherwise distribute it so that more and more money gets bet on the 'system' play, well then , goodbye profits.

Only an unlimited supply of dumb money can overcome this problem, and those folks are back flipping burgers.

 

[candletrader]

Originally posted by stock777
Only an unlimited supply of dumb money can overcome this problem, and those folks are back flipping burgers.

Therein lies at least part of the problem... conceivably there is a negative correlation between an aggregate perception and/or reality of poor trading conditions and the viability of an arbitrage trading strategy... when there are sustained poor trading conditions, there is an inherent survivorship bias amongst market participants which will reflect itself in a reduction in the efficacy of an arbitrage strategy, since the implication of a survivorship bias amongst market participants is a disproportionate level of competing smart money...

 

[vinigar]

I kind of think of sharing like this....you can drive a car well and you are licensed. Someone taught you how to drive your car. Because of this both you and I and many others can safely drive on the public roads. Therefore, if people are taught to trade well and effectively it makes it a better market environment for both you and me. No one is driving down the highway crazily. If someone is using an effective technique that they learned from elsewhere...then they can only add to the positive outcome for all involved.