Patterns should self-destruct

Discussion in 'Strategy Development' started by abattia, Jul 12, 2013.

  1. I read this, and thought I hadn't seen it stated as obviously and clearly before...

    “ … many […] patterns, even if they did exist, [will] self-destruct in the future ... Suppose, for example, one of the anomalies or predictable patterns appears to be robust. Suppose there is a truly dependable and exploitable January effect, that the stock market […] will generate extraordinary returns during the first five days of January. What will investors do? They will buy on the last day of December, and sell on January 5. But then investors find that the market rallied on the last day of December and so they will need to begin to buy on the next-to-last day of December, and because there is so much ‘profit taking’ on January 5, investors will have to sell on January 4 to take advantage of this effect. Thus, to beat the gun, investors will have to be buying earlier and earlier in December and selling earlier and earlier in January so that eventually the pattern will self-destruct. Any truly repetitive and exploitable pattern that can be discovered in the stock market and can be arbitraged away will self-destruct…”

    [The Efficient Market Hypothesis and Its Critics (Burton G. Malkiel – 2003)]
     
  2. Disagree, big funds will need to sell losers to get taxi benefits at end of dec. Smaller traders will be able to get some benefit from this effect, still.
     
  3. Yes, that's very true and a strong reason for the absurdity of using chart based TA price action. In addition, patterns by definition can only exist in the past so obviously TA folks say they work because they are already existing. Surf
     
  4. gmst

    gmst

    abattia - I don't want to comment on all the patterns and what happens to them over the long-run as there are too many factors and no one knows what will happen in the long run, in the sense which factor will outweigh others, how markets will change etc.

    But specifically the Jan effect has shifted to Dec effect during the last 10-15 years. (I read this somewhere, haven't tested it myself. So, please take with a grain of salt).
     
  5. toolazy

    toolazy

    rings true :D

    many people do not understand market <-> trader relationship. Education messes their heads and think that market is something that can be exploited like land or sea via some kind of system. They fail to realise market IS made of entities just like them. Bunch of suckers trying to outsmart each other. 10 die 1 prosper thing.
     
  6. Sergio77

    Sergio77

    Every thing will destruct one day. Imo try to exploit patterns for as long as you can. Instead of demonizing patterns try to find ways of detecting their destruction.
     
  7. the reality about big funds selling is that they start rebalancing much earlier then just the last week of dec
     
  8. Mutual fund timing ( the legal kind) was/is a real edge that worked for years.
     
  9. Sellers know why they're selling, but buyers don't. And there are many reasons to sell, only one reason to buy. Bullish patterns exist as a way for traders to signal to other traders that there are no sharks in the water and it's safe to wade in. Bearish patterns are just the failure of bullish patterns.
     

  10. A most amateur reply. Well done!
     
    #10     Jul 13, 2013