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

Originally posted by stock777

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

When Joe Blow bought his favorite stock, he would just go in and buy it. Multiply Joe by ten thousand and you have a daytrader's paradise, a sea of investors too greedy or blind to care about working their price and happy to give up an eighth or a half or a buck to any daytrader with the sense to reach out and grab it.

But the institutions are smarter. They hire professionals to work their orders, take it in dribs and drabs, and give up as little juice as possible before the position is in place. You can still take from them- elephants have to run the size up or down sooner or later- but it takes a lot more patience, and ten seconds or even ten minutes often ain't enough to cut it.

This is precisely why so many short term traders are gasping for air.
 
On low volume days, esp. during the summer, competition for fills increases. So, its not necessarily other traders.
 
This thread is rather interesting to me.

I started it so I'll add more imput.

I know highly profitable systems that are right less than 50% of the time. Yes your read that right.!! They involve catching longer term trends. I tend to only be right about 40% of the time when I find these but when I am right my winners are 30 times what I risked while my losers are the amount I risked or maybe 1.5 times (giving it some slippage or a gap past my stop)

The longer term strategies are harder to water down from what I've seen especially with having to follow a system that you must be wrong more than right. This is extremely hard for the majority to comprehend.

Now on the opposite end of the spectrum I know quite a few strategies that are very short term and have winning trades that seem to be more than 60% of the time (some even 80%). The problem with these is they are very short term. The profits are limited and if too many are doing them than when I'm trying to stop out for .10 I end up losing .35 due to too many others using the same stop.


The Ying and the Yang to speak.

Robert Tharp
 
Originally posted by 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...
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I KNOW A LOT BETTER THAN TO COMMENT much on arbitrage systems. All I can say is that they involve profiting from something being inefficient. The more who exploit it the sooner the hole closes. I know of a few but have seen the hole already get tighter.

I can give an example of one secenario though as it no longer works. A buddy of mine Ray Kelly found a loophole with companies giving discounts to shareholders who bought stock from directly from the company. He had discovered that a few would give a 10% discount and quite a few forgot to put it in writing that this discount is limited to small investors. So he raised a few billion bought a few shares of these companies. The bought millions of shares at a 5-15% discount for an immeadiate profit which he was able to sell at the market place. The companies have changed their wording so that if they do this it is limited to small investors.

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

I recall the thread and am thankful for the great insights you provided. I can't recall where the post was located, but I believe it emerged in the middle of another thread (much as this one is about to do) as the topic of these threads is prone to change. I wanted to follow up with a question or two on some of the general concepts you talked about regarding your strategy.

You presented two examples of selling and labeled one of them a high probability entry and the other a high reward type entry (lower probability). I don't believe it was an accident that the scenario you labeled as high reward was fairly new into a downtrend, and the "high probability" scenario was in a well established downtrend.

For simplicity's sake let me define a trend as a move with two or more pullbacks against a trendline. The question is this: does a trend with 5 pullbacks against its trendline have a higher probability of continuation than a trend with 2 pullbacks? In theory, should this relationship hold up on all timeframes? I hope you will see the point I am trying to get at. The basic assumption seems to be that trends persist (which is common knowledge) and well-established trends are more likely to persist than new trends.
 
An ecenomic nobel prize winner (perpahs it was Sharpe) noted that arbitrage opportunity is like a flame -- if an opportunity is present it will burn... spending the opportunity as a fire would consume an element. Arbitrage is like any other conjecture model -- if realized by x amount of people & exploited the pattern ceases to exist and/or ceases to be profitable by design. You must constantly adapt.
For the most part, in my experience people that puport to trade stat arb, relative value arbitrage & pair trading have absolutely no idea what they are doing... creating more fuel for those that do. :)
 
Originally posted by 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.:)
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Depending on the strategy being shared, you're right up to a point. But because trading is a zero-sum game - well actually a negative sum game, once you factor in commissions - there are simply always going to be losers. Not everyone can win - unlike in your driving analogy, where we can ALL become better drivers.

To give another example: I love playing basketball. I spend a lot of time practising free throws. Imagine I found a way to improve my free throw skill by 25% and I could teach everyone I knew to improve THEIR free throws by 25%, and they could teach everyone else etc. You could theoretically improve the free throw shooting of every basketball player in the world.

In trading however, where the ultimate measure of performance is money lost/won, it is simply impossible for EVERYBODY to be a better trader. The money won (by winners) has to come from the money lost (by losers).

Daniel
 
THANK YOU ROBERT. I do not trade trade stocks (eminis only) but you have created the best topic thread i have read so far in 2002. thanks for the insight
 
Originally posted by TriPack


For simplicity's sake let me define a trend as a move with two or more pullbacks against a trendline. The question is this: does a trend with 5 pullbacks against its trendline have a higher probability of continuation than a trend with 2 pullbacks? In theory, should this relationship hold up on all timeframes? I hope you will see the point I am trying to get at. The basic assumption seems to be that trends persist (which is common knowledge) and well-established trends are more likely to persist than new trends.
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Hmmm. Not sure I have a concrete opinion on this one.

A trend w/ 5 pullbacks is more established, but I agree w/ Sperandeo's way of thinking in that trends have lifespans. The party has to end sometime, things turn around etc.

So I would have to evaluate on a case by case basis. I think the overall "feel" of the past few bars of activity is more important per se than the length of time the market has been going up or down. I'm more interested in a few key elements being present than in the long term length of the trend.

There is also the probability problem that comes with measuring a single event. There is no true probability for a single event, only hypothetical- either it happens or it doesn't. If you tell me my chances of winning the lottery are 1 in 50 million and I say no they are 100% because I have psychic powers and foresaw it in a dream, and then I go and actually win on my first try, you won't be able to argue w/ me (or at least not w/ my screwed up sense of probability). Good trades give bad results, bad trades give good results at times. This is why a general thesis must be applied over and over and over to bear out for certain and you want to take as many trades as possible as long as they fit your strict criteria.

In terms of different time frames, I believe that mechanics are the same at all levels, BUT the level of randomness increases as the time frame decreases. While a monthly chart is less than 1% noise, a 2 minute chart could easily be 70% noise. I just pulled those numbers out of the air but they illustrate the basics of what I mean.

Oh just to comment on the driving on the road analogy: someone mentioned that in a popular book a few years ago, I don't recall who. But they made the point that everyone on the road has a vested interest in avoiding accidents and being civil to each other. Whereas in the trading arena, it is more like a game of twisted metal, the other guy does not want to be civilized, he wants to rip your door off and take food from your mouth.
 
Tripack asked something about a ''5 or 2 pullback trend ?'' I would want to know the time of the day + time of the month and such.:) Usually pull the trigger late ,[even in a m] but generally watch early, watch much.

I think it helps to share some,like rtharp, Deeman.

Have seen even a good profitable[unshared ].strategy have a bad week.

Even a great moving average, or deer trail can have too many traders or mountain lions on it.:( Candle trader said somrthing like-moving average + discretion.
 
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