The Theory of Edge Diminishing
- Thread starter .sigma
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Logical error again. You are assuming those who copy you don't adapt but just stay the same. It becomes a chase for the earliest entry until the original strategy (and edge) is completely lost.
How would anyone prove to you that edge disappears? It would mean people copying would have to accurately and completely disclose their buys and sells.
I agree with your post, but I might add you're assuming those who adapt stay with it and can handle the drawdown period from a strategy they found from some guy on EliteTrader and keep going until they net positive. This would be a very small sum of people I think? Of course it depends on the strategy and theres devils in the details but in general idk man.
It also depends on the strategy. Say you're trading EURUSD or ES and the edge is mild at best (say 10% APR/7% DD), the edge loss isn't a big worry. But if you need an entry within a few seconds in a midcap stock and use stops, things are very different. Like @trend2009 mentioned, very small positions move markets.
But I'm not connecting why very small positions moving markets = diminished edge
Are you saying the market will move but move DIFFERENTLY than the strategy originally predicted because others are now trading exactly the same? So the "pattern" whether it be volatility or price or what is now unpredictable the way originally strategized because of the more participants? IDK MAN!
So, if someone could ensure that the "followers" of a strategy only enter after the original trader and they wouldn't be able to reverse engineer the entries, you'd be correct in that it wouldn't be a bad thing necessarily. But to ensure this is almost impossible.
Think about it, if you know that at 10:05:00 a bunch of buy orders hit a stock, you'd get in at 10:04:58 and exit at 10:05:02 for a guaranteed profit. Whether the strategy works would become irrelevant. Pretty basic stuff.
Also, I meant that I'm already at my limit with many of my positions. Adding more would significantly add slippage.
of course it does. if small share sizes move markets large share sizes can really move markets into the 3rd stdev easily. its not that they will help your trade. they arent playing your trade anymore they start to play you for their liquidity purposes in their strategy not yours and depending on size you have just become a good place to match with little slippage. examples are everywhere why do you think companids copyright recipes and code? because your competition can beat you now. no rd no emotion. ur just beat in the end by the bigger fish
Think of it this way. Other than a couple of Super Bowl boxes each year I've never bet on a sporting event with a local bookie, Vegas or online. Although not sure we Americans can do that last one.
But if I was a degenerate gambler (j/k sports junkies) and had a online presence like say, Kim (big azz make that yuge ass) Kardashian and all my followers wanted in on my winning "system" and we all used that same gambling venue (absurd of course but play along for the example) the bookie or casino would adjust their odds/payout when hit with all similar plays.
The other casinos such NYSE/CME/etc and their other players aka traders all do the same.
Markets adjust.
Edges, big and small, come and go all the time. Why accelerate the process voluntarily.
But if I was a degenerate gambler (j/k sports junkies) and had a online presence like say, Kim (big azz make that yuge ass) Kardashian and all my followers wanted in on my winning "system" and we all used that same gambling venue (absurd of course but play along for the example) the bookie or casino would adjust their odds/payout when hit with all similar plays.
The other casinos such NYSE/CME/etc and their other players aka traders all do the same.
Markets adjust.
Edges, big and small, come and go all the time. Why accelerate the process voluntarily.
I really like your examples, and they make sense in my brain, but something about it doesn't seem "reality like" to me. You're explaining a best-case scenario, assuming people will trade your strategy through the cyclicality of markets and trading the same underlyings as you (highly unlikely)