Protecting your strategies

[guy990opl]

Stealing a strategy is not as simple as you make it sound. I personally know an option trader who is also a money manager, he is registered with the NFA. If you are a client you can see exactly what he does and you could try to learn what he does and even place at a later time the very strategy on your own. Guess what?

He does not care.

All you have is his strategy es diagonal spread, iron condor etc but you'll never know why he opens it at a certain time or closes it.
The opening / close of his trade is not discretionary but it is part of a proprietary system he developed over 10 years and mirroring the very same strategy will not give you the same results because you still do not know when to employ such strategy. Why did he get in today, why last week he was out of the market, why one of the spreads he had was buy 1 put and sell 2 but the other was buy 1 and sell 3 ?

My 2 cents is that there are many ways to make money in the market, but they are all very difficult to find and it takes much more than copying a strategy or and to look for a logic behind it.

A parrot is able to speak and pronounce words correctly, but it does not make any sense in a conversation.

 

[trend2009]

I decoded a profitable trading system my self, though it is not trivial, and I could not say I have reverse engineered 100% identical to the original, since i do not have too many trades from the system, but I can design my own profitable trading based on the decoding.

Quote from logic_man:

The potential number of variables that go into identifying the common scenario makes it practically impossible.

Imagine trying to guess 1000 encrypted passwords and each password could contain any letter, number, hieroglyphic, ideogram, wingding, astrological symbol, etc. Even a supercomputer would take an eternity to complete the task.

 

[dom993]

Quote from gpiu:

In my experience, a robust successful strategy is inherently non-stationary in nature in order to adapt to a changing market.

This sounds very exciting, yet I have no "real world" idea of what you mean.

Care giving a basic example of a non-stationary strategy adapting to market conditions?

 

[trend2009]

in your case, the number of parameters is not three, since there are too many other markets like USD/EUR.

we are talking about a trading system based only on one candlestick chart.

Quote from Epic:

With my strat, the complexity doesn't come from the final handful of parameters, it comes from what it takes to identify those parameters. Anyway, let's say that the trigger is based on even just 3 simultaneous events. You then say that, with the raw data, numerical analysis would easily identify these three events. That is only true if you know which data, beyond the transaction data, to analyze.

Let's assume that a system with only 3 parameters trades ES long the open and always offset at the close as the first parameter.

The next parameter, is to only trade the open if there has been a gap larger than 1/2%.

So now any decent trader will say that these first two parameters would be easy to figure out and that only leaves one more parameter, which should be very easy.

The last parameter is to trade a 10-lot long when both of the following two conditions are met;
-USD/EUR is up more than 0.2% from previous close.
-ZN has moved less than 0.02% from previous close.

You have absolutely no idea that you should even be looking at USD/EUR or ZN, so you are automatically accepting the fact that you must scan every possible related security, looking for a condition that you don't know how to define. And in the case of ZN, you are actually looking for a "non-move" which is infinitely harder than looking for some quantifiable event in the price action.

I think the point is obvious, and that was a system with only 3 very basic parameters. Mine has more than a dozen parameters, and runs both numerical and statistical analysis in real-time to locate and execute trades. Someone would literally have to spend years trying to figure it out, which is how long it took me to figure it out in the first place. The only benefit that they get is in knowing which underlying to start analyzing.

It really is just as easy to develop your own system.

 

[trend2009]

for example, in one forum, I often followed one guy who posted real time trading signals on stocks. I know he traded on candlestick chart. so every time he posted his signal, I checked the chart, most of time, he traded on 1-min chart. from a number of charts, it is obvious he trades on breakouts. the next question, why he entered on those breakouts? from a large number of his trades, I found the common scenario associated with those breakouts. Thus, from there, I designed my own strategy. I did not see I knew 100% of his strategy, but I believe I knew enough.

Quote from dom993:

This sounds very exciting, yet I have no "real world" idea of what you mean.

Care giving a basic example of a non-stationary strategy adapting to market conditions?

 

[logic_man]

Quote from trend2009:

I decoded a profitable trading system my self, though it is not trivial, and I could not say I have reverse engineered 100% identical to the original, since i do not have too many trades from the system, but I can design my own profitable trading based on the decoding.

If it's not 100% the same as the original, then in, for example 2 years from now, the results you get and the results from the original will be completely different. Perhaps your results will be better, but that hardly seems like the kind of outcome that you would call "reverse engineering".

The whole idea seems completely undermined by "omitted variable bias", although, to be fair, OVB is more of a term in regression analysis, but seems applicable even here.

http://en.wikipedia.org/wiki/Omitted-variable_bias

 

[achilles28]

Quote from Epic:


The most likely problem is going to come from your own programmer or IT specialist. Make sure that any such individuals who might have access to any significant part of the system are internal employees and properly incentivized to make sure that they never get any ideas. They should be compensated based on the profitability of the program and they should also be able to participate for free. Don't ever give them any reason to want to run it on their own. Just make sure that they will always make more money running it for you. If they aren't worth profit sharing, then they shouldn't have access to any key portions of the strat. Obviously, NDAs, Non-Competes, and Non-Circs are always necessary.

Good points. But how exactly does one align IT compensation with performance, to ensure retention? Imagine a strategy that does 100%, a year. And the few programmers who run it make 250K a year. Whatever bonus the firm could offer would be arithmetic, juxtaposed to (theoretically) a geometric rate of return. In layspeak, its always more profitable for the IT guy to steal, "lose", transfer or sell the strategy. But like the other dude mentioned - nothing ventured, nothing gained. Sometimes its better to risk diversion and theft, to kill it for a few years... This part bugs the heck outta me. On the bright side, a few technical strategies are well-known, and the market doesn't change. Even if the classical edges are passed around like a mexican whore, it's not the end of the world...

 

[dom993]

Quote from achilles28:

On the bright side, a few technical strategies are well-known, and the market doesn't change. Even if the classical edges are passed around like a mexican whore, it's not the end of the world...

Can you describe here in plain english one of these well-know technical strategies, with a "classic" edge?

 

[achilles28]

No, I cannot!

I suggest you do a bit more "leg work"...

 

[dom993]

Quote from achilles28:

No, I cannot!

I suggest you do a bit more "leg work"...

Then I suggest you edit the post that triggered my question & remove the 2 last lines. I will then remove my later posts.