The Theory of Edge Diminishing

[ESgambler]

It won't disappear. It just becomes harder and harder to trade your setup when everyone acts on it. Among few day trading setups I've, there is one or two setups I often run into troubles to trade them nowadays. Years ago, I had to wait for confirmation before placing a trade. Recently, I'd miss the entire move if I hesitate for few seconds to few minutes because price already took off and far away from my base line. This happens more frequently and I can tell that more traders/HFT have discovered it and acting on it judging by increasing volumes in recent years.

These two day trading setups were meant for a gain of two to four points for each ES move from base line. If price suddenly moves so far and so fast, that means I already miss it and can't chase it anymore and the worst part is that I might have to wait for days in order for these setups to appear again.

 

[wmwmw]

Richard Dennis has talked about this a bit over the years.

“I don’t think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline.”

From: https://www.turtletrader.com/trader-dennis/

and

"I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anyone can make up a list of rules that are 80% as good as what we taught our people. What they couldn't do is give them the confidence to stick to those rules even when things are going bad."
- Richard Dennis

Attributed to: Market Wizards by Jack Schwager

I think Richard Dennis mixed up two things:

One kind of edge which is mainly depended on personal ability. It's kind of like a poker skill, even most of people know it, few can apply it to the best extent.So this kind of edge is essentially a personal ability, not a knowledge. Also this kind of edge is usually small, only can let you beat market marginally.
Another kind of edge is a knowledge, simple and easy to use by most people. For this kind of thing, once public know, it will no longer work.

I now make a prediction here that 10 years bond will rally big for the next a few weeks.
And this kind of prediction doesn't depend on any trading ability. It is simply a knowledge that market participants do not know. If they know, 10 years bond would not drop for the past a few days.

 

[Sig]

I think Richard Dennis mixed up two things:

One kind of edge which is mainly depended on personal ability. It's kind of like a poker skill, even most of people know it, few can apply it to the best extent.So this kind of edge is essentially a personal ability, not a knowledge.
Another kind of edge is a knowledge, simple and easy to use by most people. For this kind of thing, once public know, it will no longer work.

I now make a prediction here that 10 years bond will rally big for the next a few weeks.
And this kind of prediction doesn't depend on any trading ability. It is simply a knowledge that market participants do not know. If they know, 10 years bond would not drop for the past a few days.

And if you think you have some special kind of non-replicable, non-testable "personal ability" that allows you to make "predictions" you're in good company with everyone from the Greek Oracles to modern day fortune tellers. There isn't anyone with this kind of "personal ability" in the "few weeks" range, it's entirely bullshit which performs no better than random chance if you did an actual legitimate forward test monitored by outside observers (happy to have you prove me wrong with anything that's been published). Anyone who flatters themselves into thinking they have this magical "personal ability" does themselves a huge disfavor but they are great counterparties for the rest of us who trade!

 

[Sig]

One of my strategies in the past involved trading a class of illiquid equities. I analyzed its performance a few weeks after going live. The real results were nothing like the backtesting. It ended up that I moved those markets by trading too big. So in effect I arbed out my own edge.

On a side note, with the new commission free trading I plan to revive that strat by trading tiny positions across a huge breadth of tickers.

That's a very insightful set of observations, both your original and your current idea. One edge is the ability to realize what has been enabled by a new development before anyone else does which you exploit until everyone else figures it out. Use of commission free trading fits that.

 

[trend2009]

My commission free broker is Fidelity which does not offer any automation or API trading.

You might want to look into Schwab which is commission free and acquired TDAmeritrade. Assuming Schwab does not scrap the ThinkOrSwim platform, it comes with auto-trading and scripting capabilities.

I've never used ETrade but they are now zero commission and have API based trading (Python and Java).

thanks a lot. I will contact schwab and etrade to see if they meet my requirements.

 

[Option_Attack]

Ironically, or maybe just a natural progression, the "Turtle Trading" methods no longer work.

Richard Dennis has talked about this a bit over the years.

“I don’t think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline.”

From: https://www.turtletrader.com/trader-dennis/

and

"I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anyone can make up a list of rules that are 80% as good as what we taught our people. What they couldn't do is give them the confidence to stick to those rules even when things are going bad."
- Richard Dennis

Attributed to: Market Wizards by Jack Schwager

 

[guru]

There is a reason hedge funds guard their secrets and their people, or pay $millions to steal best people from other funds.

An example of a disappearing edge may be commonly "discovered" fact that SPY/ES/SPX go up overnight by higher percentage or more often than during the day. So whoever discovered this edge first would've start buying ES futures at 4pm to sell the next morning.
Another guy found out and started buying ES futures at 3:59pm and created a new edge for himself because the previous guy would make sure the price doesn't go down and possibly even higher at 4pm.
Third guy found out about the 2nd guy and started buying ES futures at 3:58pm, creating another edge especially knowing that 2 minutes later there will be 2 more guys buying ES futures.
Fourth guy found out about the previous 3 guys and started buying ES futures at 3:55pm, then selling them between 3:58pm and 4pm to the 3 previous guys pumping the price by buying. Poof, old edges gone, new ones created.
Later all these guys found out about each other and now everyone rushing to buy ES futures before everyone else by market close - poof, all edges gone.
(this example doesn't need to apply only to ES futures, and similar or totally different edges could be found in any stocks, but depend on timing and no one else front-running you)
And actually both HFTs and slower trade desks and funds play this exact game, just at different time scales.

 

[guru]

Another example of disappearing edges are plays that game/cheat/take advantage of market makers. I had such albeit small edge with options arbitrage, but as soon as market makers started losing money they've plugged holes in their systems.
A more subtle but clear example may be weekend option decay/Theta. As soon as market makers figured out they could be gamed by someone selling options Friday eve and buying them back Monday morning, they started decaying options on Fridays. Later some reported decaying options by mid-Thursday. Now they use sophisticated models to make sure no one has an edge over them.
Though this example also shows that timing matters and whoever decays options sooner would lose less or at least smooth out any mispricing.
While different market makers would love to see the models of their competitors to look for holes and arbitrage opportunities

 

[wmwmw]

And if you think you have some special kind of non-replicable, non-testable "personal ability" that allows you to make "predictions" you're in good company with everyone from the Greek Oracles to modern day fortune tellers. There isn't anyone with this kind of "personal ability" in the "few weeks" range, it's entirely bullshit which performs no better than random chance if you did an actual legitimate forward test monitored by outside observers (happy to have you prove me wrong with anything that's been published). Anyone who flatters themselves into thinking they have this magical "personal ability" does themselves a huge disfavor but they are great counterparties for the rest of us who trade!

Not only you messed up with my words"personal ability", but you have zero understanding of market.
I have no desire to talk to you,please don't reply .

 

[Real Money]

A lot of traders are looking under rocks and in gutters to find edges.

Could be things like cointegrated pairs that lag an associated instrument.

Maybe they learned how to short a basket of weak stocks that have a significant representation in an ETF and then long the broader market in a relative value trade.

Or, it could be market making options conversion/arbitrage in a name that is not so liquid.

The best edge might not be in the most liquid set of instruments. These guys are looking to get away from players that have advantages they don't, or step in where others are not interested in playing.