Why are markets more prone to false breakouts when it is heavily observed?

[Amatrue]

I have been reading market wizards by Jack Schwager and a few of the wizards have mentioned markets being more prone to false breakouts when it is heavily observed. Similarly, they believe trade strategies are more likely to fail if more people are using them.

From my understanding, wouldn't a heavily observed market prevent false breakouts and a widely used trade strategy be more successful?

 

[Robert Morse]

I can't speak for JS or any other wizards, but it makes sense. Real, sustained breakouts do not get feed with day and swing traders. They require institutions or a following to accumulate large positions overtime. They require long term investors to want in. They buy consistently over time and buy dips and reduce supply in the market for a longer period of time.

 

[Scataphagos]

I don't like to disagree with Morse, but both of the above posts seem to fly in the face of my "Price TA, KISS", Chapter 1.... which requires that breakouts are to be chased.

 

[wrbtrader]

I have been reading market wizards by Jack Schwager and a few of the wizards have mentioned markets being more prone to false breakouts when it is heavily observed. Similarly, they believe trade strategies are more likely to fail if more people are using them.

From my understanding, wouldn't a heavily observed market prevent false breakouts and a widely used trade strategy be more successful?

Its simple...

If you share an automated trading system with the masses...those that actually move the markets via their institutional trades will not be aware of the trading system. Simply, it doesn't matter what you're using...it will have no impact of the price direction. If they are aware of a successful automated trading system...they find the creater and give him/her a multi million dollar salary job.

In contrast, if you're trading a market that's illiquid (thinly traded)...a widely used trade strategy should be successful assuming all those using it can get into the trade and then get out of the trade.

Yet, if its not automated and applied in liquid markets...100 different people using the same trade method will still trade it differently from each other or put their own little special twist on the trade method....reason why two different traders using the exact same trade strategy and trading the same market will get different trade results.

wrbtrader

 

[Specterx]

I have been reading market wizards by Jack Schwager and a few of the wizards have mentioned markets being more prone to false breakouts when it is heavily observed. Similarly, they believe trade strategies are more likely to fail if more people are using them.

From my understanding, wouldn't a heavily observed market prevent false breakouts and a widely used trade strategy be more successful?

Your understanding is backwards. Market speculation is a zero-sum struggle for edge. Think about what a profitable trade means: you took money from some other guy's pocket because he got the direction wrong and you got it right. If everyone is looking at the same thing and is positioned the same way, then there's nobody left to be wrong-footed and thereby lose money to you. Nobody takes the other side of your order out of charity.

It's for this reason that markets generally don't do what is obvious, or what most players expect or want, when reacting to widely anticipated future events or known information. That applies to obvious TA patterns and breakouts in widely-followed symbols, it explains the age-old "sell the news" effect, as well as the erosion of easily-replicable strategies like factor investing.

To suggest that a strategy offers MORE rather than less edge as it becomes more widely used, is akin to suggesting that it's possible for the average investor's return to exceed that of the index - which is clearly impossible.

 

[maxinger]

I don't trust whatever market wizards (no matter how 'famous' they are), market experts say.

false breakout occurs when

- the big boys are not around
- you are trading instruments that hardly move for donkey days/weeks/months
- you are trading a very ill liquid instrument
- you trade at the wrong time when big boys are having tea breaks
- there is no major news / events / triggers
- big boys are around but they are simply not decisive
- etc etc etc


anyway do your own analysis

 

[padutrader]

breakouts

it depends what you mean by breakout

when one bar breaks the high or low of another, it is a break out.

when the market goes above a pivot, a moving average , a fib no,......it is a break out.

 

[padutrader]

Think about what a profitable trade means: you took money from some other guy's pocket because he got the direction wrong and you got it right.

true but there are other scenarios....
if one trader is closing a long, someone may be opening a long or closing a short.the trader closing the short may be closing for a profit......while the trader closing the long may be in profit too

 

[Nobert]

..., if you're trading a market that's illiquid (thinly traded)

from which number(and all the way bellow) of daily volume, you would consider market - illiquid ?
(if you would have to go - swing trading)

They buy consistently over time and buy dips and reduce supply in the market for a longer period of time.

He mentions this change at

10:04

Did that changed, of how long does it take, for them to build a position nowadays ?

Thank you both.

 

[LloydPhill]

Its simple...

If you share an automated trading system with the masses...those that actually move the markets via their institutional trades will not be aware of the trading system. Simply, it doesn't matter what you're using...it will have no impact of the price direction. If they are aware of a successful automated trading system...they find the creater and give him/her a multi million dollar salary job.

In contrast, if you're trading a market that's illiquid (thinly traded)...a widely used trade strategy should be successful assuming all those using it can get into the trade and then get out of the trade.

Yet, if its not automated and applied in liquid markets...100 different people using the same trade method will still trade it differently from each other or put their own little special twist on the trade method....reason why two different traders using the exact same trade strategy and trading the same market will get different trade results.

wrbtrader

You are wrong with your analysis. In simple terms, if everyone is using a particular successful strategy, the market will move in other direction because there is always an opposite side of trading. Those who lose and those who win. There has to be a balance. This is one reason why most successful traders don't share their strategy until they've made millions with it. The less crowded, the more successful the strategy will be.