Edge types, efficiency, etc

Discussion in 'Trading' started by New2thegame, Jan 10, 2010.

  1. I'm new to actually trading, but have studied for quite a while. I'm a pretty sharp dude, but just haven't pieced a necessary pile of knowledge together yet and I hope to get help here. I know there's a lot of negativity here and I aim to avoid attracting it. I do want honesty even if it's brutal, so please feel free to be appropriately pointed in your arguments.

    My intent with this initial thread is to use a series of questions to spark a discussion that hopefully will help me and possibly others form useful beliefs that can possibly used to for a winning method. I lean hard to an empirical approach and try my best to stray from untestable or subjective methodology, but am open to anything well thought out.

    I know we all know some things, and nearly all of us think we know some other things, but if I had to guess, a solid way to approach trading is to form a belief system that is close to truth as possible and hoping to end up with enough legos to build something. That said, I have a lot to learn, but I at least think I am entering with a good level of skepticism, high hopes, a general understanding of the topic, and a lot of hopefully reasonable questions.

    1) I've read some books lately that I've been told are some of the better trading books out there (feel free to opine): Winner Take All (Gallacher), and Evidence-Based Technical Analysis Aronson), and a hefty amount of Larry Williams books which contrast the previous two sharply in their level of optimism, amongst other things. It seems Gallacher is an intellectual that is rather depressively convincing. He more than suggests that while technical system trading can make money, that opportunity is dwindling fast due to technological advances and increasingly more efficient markets. He claims that he can't really recommend the mechanical approach as it's increasingly hard to follow as the available gains are reducing. Alternately, he suggests trading on fundamentals is the only way to have a substantial edge and experience large gains. How depressing since I've apparently wasted a ton of time focusing on first TA, then having moved on to mechanical systems trading... I suppose I want to start by finding out about how people here feel about this? How correct is he?

    2) Which markets offer the least efficiency or the greatest odds of systematic exploitation? I've read much about how the most highly liquid markets offer the least amount of opportunity since edges vanish quickly. I've heard people say that the markets that are traded less offer more opportunities because less pros and bots are abound. Of course a concern here might be these less traded markets have larger spreads and higher general costs which may hurt any advantage we might find there. Thoughts on this? Is it rational to believe that futures (being zero-sum technically, and have a high-level of interest) are more difficult to systematically trade than a small cap stock?

    3) I understand how important costs are to the game at any timeframe, but also realize to make substantial returns requires you zoom in some from buy and hold. In other words, long-term investing being one extreme, and scalping to be the other. Many suggest you need to swing or position trade to reduce the markets (read house edge) edge to give yourself a chance. That said, is scalping a realistic possibility anymore, even with very low non-retail commissions? Do you have opinions on where the best opportunities lie for retail traders in terms of costs regardless of market?

    4) What types of edges exist? This could and possibly should be a thread unto itself, really. I know many claim reversion to the mean, excursion from the mean, seasonal cycles, other types of time cycles, spreading between correlated markets, intraday patterns, longer-term patterns, fundamentals (finding value mostly, I suppose), volume/price relationships, volatility speculation in options, mispricing of options, etc. Did I miss anything? I know of things such as arbitrage but as I understand it, there really doesn't appear to be an opportunity to an outsider to trade this way.

    5) I've met a few people living here in Chicago, one of which I know (we're well acquainted and he lives very well) makes a living trading his own account at the exchange (he has no other job), but he refuses to discuss his methods in virtually any capacity. He has only been encouraging insofar as asking me to take an IQ test and offering to submit the results and a resume to parties who may take me under their wings in or around the exchange. Obviously he is of the mindset that the less who 'know', the better, or is under some kind of NDA i'm unaware of. What is this guy likely doing that he needs to trade his own account from the exchange? I would assume he's trading something at a high-frequency, but that's just a guess based on why he might bother paying for a seat there. I've heard him say he's made as much as 200K in a day and lost as much as 80K in a day (his lifestyle would seem to support the reality of this, but I can't definitively verify anything). If this is true, he's obviously trading size, but what are traders like this most likely doing? Even from a macro point of view?

    6) I've spent time trying to develop systems both intraday and based on daily charts and I've found that while I thought I found something repeatedly, I was quickly disappointed by how checking an out of sample set or walking forward it didn't hold well. It seems to me as if the futures markets almost seem to know what you are trying to do and it changes on you as soon as it's given you too much. I've tried extremely simple unoptimized and complex, highly-optimized rules and find largely the same thing. I've tried very hard to avoid model selection bias and curve fitting traps; wrapping an idea around a chart rather than gazing at charts looking for non-existant visual patterns, but I still largely come up empty-handed. Why is this? Can the markets really be mostly efficient? If so, how do those who claim to daytrade for a living make livings? Is everyone here lying? I would assume many are, but who isn't and what are they doing to get an edge? Again, I don't expect someone to show me tick for tick how to do what they do (although that would be spectacular), but how does one obtain their edge? I've looked at price, time, removed nearly every indicator, removed myself mostly by shooting for a mechanical approach. I've spent hundreds of hours poring over charts and books. What is it that I am likely missing?

    Thanks for the help, sorry for the ridiculously long first post, and take it easy on me.
  2. I suppose in my rush to create my first post, I left out the possibility of combining fundamental information to technical systems as an edge type. I mean, I know some say (Including Gallacher) that you can trade technically so long as you have a valid fundamental reason to go in the direction of your signal. This at first glance seems to make a fair amount of sense, but it this required? Are there no edges to be found simply from price action and chart patterns alone anymore?

    I suppose another big one I forgot to ask about is whether any edge of any kind, in any market is robust enough to be a permanent advantage? I've heard people on this forum allude to having such things that in fact are so robust they cannot disappear less the market ceases to exist. Is that a reasonable assertion or is that nonsense? If a permanent edge isn't possible, then is it fair to say that a great trader doesn't have an edge other than knowing how to adapt to changing markets by exploiting whatever inefficiencies are available at a given time? In other words, can a true professional survive on a single idea, or single set of ideas or must they be a genius market chameleon that changes faster than most can ever hope to in order to stay ahead of the masses?
  3. I guess I put everyone off by making my posts too long. Sorry about that. Anyway, I hope some take interest in this thread. Surely there are some opinions about some of the questions asked. Thanks for your time.
  4. didn't read posts 2&3 but your first post was actually a rather good assessment.

    Assuming edges are about outperformance in trading (finding market inefficiencies) and not about things like lower commissions or

    I would say definitely read the Aronson book on TA. Most traders seem to be totally hung up on thinking that TA is the holy grail. As Aronson and a number of studies shown, trying to use classical TA patterns and indicators is mostly fool's gold. There is a powerful TA believer's lobby on ET, and there is rarely solid proof or evidence in their posts.

    There is also a large group of traders here, usually newbies, who are dazzled by Jack Hershey (spydertrader), SCT and his ilk. You will not likely find any successful traders here on ET for a while, that think Jack is anything other than a guru-worship desirist.

    There are also a number of Gann, Fibonacci, Elliott Wave, astrology and other seekers of the mystic. Again, little proof, lots of belief. Sort of like an online Elks/Moose lodge group.

    There is a somewhat sizable group of people here who trade price action (more like "pure" price action), who eschew any kind of indicators, and totally focus on the price action of charts on various instruments,. On the other hand, it is believed that it can take a minimum of 8-10,000 hours of screen time.

    For actual edges that seriously outperform the market, it is doubtful that real traders are just going to hand them over, although a lot of reading in many threads can uncover things that may assist you.

    There are a number of charlatans who will start off threads as if they hold the keys to the kingdom, newbies excitedly prostrate before them but again, independently-verified results are usually lacking.

    There is also a steady diet of 3-post spammers trying to sneak in their trading advisory website. The value of spam can generally be guessed if they need to post and run...
  5. l2tradr


  6. The Unknown (by Donald Rumsfeld)

    As we know,
    There are known knowns.
    There are things we know we know.
    We also know
    There are known unknowns.
    That is to say
    We know there are some things
    We do not know.
    But there are also unknown unknowns,
    The ones we don't know
    We don't know.


    I hope you had fun...
  7. You ought to have an expectation of "learning everything about everything" and then realizing what you need to ignore and forget. If you're going to mine for gold, you have to work through all of the slag, it cannot be bypassed. :cool:
  8. GG1972


    Your post is actually quite informative and I am pretty sure anyone who goes through it can relate to it in their beginning years.

    Just my take and I mean it in all seriousness

    1. Decide what ( as in stocks, futures currency etc you are going to trade) I trade only stocks, sometimes options and that's my edge _ I have never been tempted by currency trading or futures inspite of all the pumping about how easy Forex is.

    2. Find an edge--this is first real step. Look at charts -just to give you an idea I used to look at at least 1000-2000 charts a day and took me at least 3 years to find where my edge is. 1000X220(approx trading days in a year)X3(#of years)=660000 charts
    Now go figure. Other people will tell you differently but I am just telling you about myself. During the said 3 years I tried everything from candlesticks, moving averages, S&R, fibbonacci, gann, elliot wave etc etc

    3. Books - pretty much useless, you will find more relevant information on net than in any book and you can pretty much google for the information. Main thing is filtering the information but if you stay on these boards you will at least become good at that in a few years :)

    4. Learn trade management and money management --its very basic but most important thing in trading. You can't expect to come out ahead if you lose $3k on one trade and make $250 on your winner. I ve been there and probably you will too.

    5. Edge- no one is going to give you their edge unless you are a very hot chick or you are related to the said trader ( even then I doubt) but you get the idea I hope. Trading is soooooo much like poker--if I show you how to play exactly like me I might as well give up. And frankly most new traders dont really appreciate it either when you give them good advice-they like to take their advice from flashy hype-it guys who can make it "seem" they are successful.
  9. Thanks for responding. Thanks to all that are taking time to chime in.

    I have read Aronson's book and find it to make complete sense, but similar to Galacher's book find it somewhat depressing that this is the case. I know, I know, no free lunch but these authors make it seem like you'd have better luck foregoing the process of learning to trade.

    When you mention price action, images of simply watching ToS or DOM come to mind, is what what is implied or does the term also incinuate exploiting chart patterns as well?

    I will watch out for the Charlatons and feel that I have my good eye open to them already. In other words, I feel I largely know what is ridiculous, but am left with the other possibilities which still leaves a large universe of things to search through.

  10. spindr0


    Month after month there are endless debates/arguments here about what does and doesn't work. Math versus economics, TA versus FA, ad nauseum. Who's right? No one. The only thing that matters is if you can find something that works for you. You can spend years reading, learning, chasing down OP's ideas and if you get lucky, you find one that suits your risk tolerance and provides an edge. So you look at everything you can and explore what makes the most sense to you.

    I'm no rocket scientist or trading genius. Just a retired peep trying to make enough to cover the bills so I don't have to crack into the nest egg. And then along comes a global financial crisis and a trading strategy gives me two of the most rewarding, exciting trading years that I could have ever dreamed of. Now that it's over, in retrospect, I think that I now comprehend what it's like to need an intervention. :) And now it's back to grinding out small gains to cover the bills.

    My point? I've been to Pareeee and I hope to get back. It can happen - it took me 15 years of investing and 7 of day trading. Don't get discouraged. Even if you don't get there, it's far better to understand and manage your risk and destiny than to be an everyday lemming trusting your life savings to a former used car salesmen now vice presidents at Bear Stearns or Lehman and following them over the cliff in a period like '08 to '09.
    #10     Jan 11, 2010