Profitable Strategies being impacted by the #'s using them.

Discussion in 'Trading' started by rtharp, May 9, 2002.

  1. There is truth in this but I also have significant disagreements with it.

    There was a famous Celtics game where Larry Bird looked his defender in the eye and basically said "Okay listen, first I am going to go here, then I am going to do this and this, then I am going to shoot in your face and win the game." And Bird did it.

    Or a second example: if two people are playing chess and one of them builds up a structural advantage through small subtle improvements over the course of a few dozen moves, then all those little things will add up to a raw advantage that lets him attack with all the subtlety of a bulldozer and still win.

    My point is that if your method has a built in structural advantage that your opponent (food group) cannot overcome, there is nothing they can do about it, even if they know exactly what you are doing. I could write a letter to all the big mutual funds and oversized hedge funds and program traders and anyone else with hundreds of millions and say:

    "Listen guys, I am taking money from you on a regular basis. Every time you start building a position or start unloading a position I can see your footprint clear as day, and I can smell you downwind sometimes even before you act. So I come in there and take a small cut."

    What will those guys do? They can't stop buying and selling. They can't hide the fact that buying pushes stuff up and selling pushes it down. Of course, they don't really care about guys like me either, because even if I get up in the twenty million range, I will still be like that tiny little fish that swims up to the big fish and takes a bite out of it's side (sabre toothed blenny I think they are called). Painful for a split second but too hard to catch and too small and fast to go after.

    Sometimes it is more important to think about the group you are taking from than the guy sitting next to you or copying you. If the pie is huge, we can all be doing the exact same thing and everyone can eat. If the pie is small, then we will be fighting over the same slice.

    Also there is a large element of a strategy which has to be reproduced on a daily basis, day in and day out. Rules are important but so are many intrinsic qualities that cannot be copied.

    I scan six hundred charts a night in roughly four hours time- it takes years of study and fine tuning to pull that off. I have professionals work my orders- my own personal market makers, so I don't have to waste time or energy doing that. The ticket charge is easily covered by the cents per share price improvement on my entries and exits- but again, there is a size advantage there, it wouldn't work if I were smaller. I have a system efficient enough for me to monitor as many as twelve positions at once- needless to say a bit of coolness, calmness and ordered perfectionism is needed for that.

    Point being that the rules are really just a jumping off point. There are other key elements you can't teach or can't give. There is some book out about branding where they asked the Starbucks founder what the most important element was. He thought for a minute and said "everything is important." This is why if you give a guy a set of rules and nothing else, you've still only given him maybe half the equation of what makes your method work.

    If you want to do arbitrage, you are competing with all the PhD's and the MIT math geeks and the twenty million dollar R&D budgets at the big quant houses. To me that is kind of like trying to sell hamburgers vs. McDonald's or sell cars vs. Ford / GM. This is why I don't spend time trying to calculate the latest statistical variance because I know that somewhere out there someone with ten calculators and a supercomputer has already gotten to it.

    In my opinion, you want to focus on your advantage. They are 'big', we are 'small'. So why play their game? They work the structural advantages to their benefit by throwing tons of money at every quantitative solution. But they will NEVER be able to solve the problem of being so freakin' BIG because, most of the time, an advantage can also be a weakness on the other side of the coin. Sprinters run fast but can't lift heavy weights. Weight lifters can bench press 400 pounds but can't run. Elephants have only one natural enemy besides man (the cobra) but they have to find ridiculous amounts of food every day. The field mouse has to be afraid of just about everything bigger than him, but he will never ever have to worry about starvation. On and on and on.

    Why not do the same as them? Play to your advantage. Why should a mouse dick around with an elephants game? Build your method on logical rules that can never be tampered with, never be nullified, and focus on your ability to move fast, not your ability to do research. An influx of buying will always raise prices over time. An influx of selling will always lower prices over time. If a portfolio manager is buying in the morning, then odds are better than even he will be buying in the afternoon too. Same thing for selling. On and on and so forth.

    I guess this is more than my .02, call it a nickel this time. Lazy Saturday morning (afternoon already? Good grief i woke up late....)
    #41     May 11, 2002
  2. There is no doubt that fundamental changes to the game can affect the profitability of the traders employing strategies that are adversely affected by these changes. There isn't always an offsetting winner. Sometimes the changes just make the game worse, but sometimes the game gets better for those who adapt to/exploit the changes. Some changes that come to mind are decimaization, PDT rules with 25K limit, the uptick rule for shorting, the advent of electronic emini trading, changes in price limits over the past 6+ years leading to a reduced chance of hitting the price limits, the advent of Globex overnight trading and extended hours trading in other markets, implementation of stock speed bumps after the 1987 crash...
    #42     May 11, 2002
  3. vinigar


    Good post bud....makes sense to me:)
    #43     May 11, 2002
  4. the reality is that, should one game be shared, then each of us would, just like a bell curve that's wobbly, have different results, because of these factors:

    1) once liquidity is absorbed, it doesn't matter what strategy is being employed, it won't effect the outcome, but cause another outcome to occur

    2) once a trade is closed, one no longer has a beneficial interest in the outcome of the trade, but may have a cursory interest, although not having a position

    3) FIFO dictates how the market works, and LIFO dictates how we view the outcomes, wishing that we sold later or bought sooner

    4) once orders are entered and placed, no one realy knows what strategies are being used, just that an action has been taken.

    5) in the overall, one can see a wave of buying or selling, which might or might not represent a strategy having been employed

    Net, net, net

    it doesn't matter whether you share or not share a stratgey, just do it, and see what happens
    #44     May 11, 2002
  5. Kymar


    Nice post - I think the excerpt may sum up the basis of technical trading, esp. the "Western" style since at least the time of Dow and Kerr, and as extended by Schabacker/Edwards/Magee - even if the biggest players or groups of players need to define their niche differently.

    People get caught up in pattern x or indicator y, and seem to expect it to trade for them. The language most of us use tends to reinforce the perception that it's the MA (or the historical price level, or the golden cross, or the doji, or the trend-line, or the volume spike, etc., ) that "supports" or "resists" price movement, when all that stuff is meaningless except where it represents real buying or selling, or the potential for same. People even get angry when price refuses to do what the MACD seemed to promise it would do. When things reach the point where traders are buying on anticipation of an MA crossover or some other signal, then they've really put the cart before the horse.

    If a particular tactic is based on some irrational inefficiency (e.g., equities correct ca. 1200 EST) or unique historical circumstance (e.g., end of the millennium conjuncture), then it's more subject to disappearance. If it's based on data-mining and faulty statistical precepts, then it's highly unlikely to work for very long, if at all. If it's based on an understanding of human nature as expressed in the language of trading (to use one metaphor), then it's more likely to be durable, and more likely to be multiply and independently confirmable (or disconfirmable) by whatever indications. Finally, whatever the basis for the tactic, if it's a good tactic but is mishandled (as may occur more often than not), then it may very well produce worse than random results.

    In the meantime, anecdotes and uncontrolled, obviously unscientific studies reveal little. They're certainly unlikely to demonstrate conclusively that a given tactic stopped working because too many traders figured it out and were attempting to employ it, rather than because underlying conditions changed. Even if it were possible to perform such a study - while controlling for numerous independent factors - and yield some evidence for the former, it still might be difficult to show that the two processes weren't interrelated - that "traders figuring it out" wasn't simply another facet or by-product of the maturation or evolution of a given set of conditions.
    #45     May 11, 2002
  6. I believe that in some strategies the more that play them, the less they become valuable. The more specific the strategy, the more true the statement.

    On the flip side of the coin, I believe you can share strategies that are not specific to a certain stock or market. I can teach the way I trade (and I do at the ECHOtrade workshops with Robert) and it will not affect me one way or another because one trader may apply it one way, and another trader will play it another. I truly believe that and Robert knows I feel this way.

    Granted, I would never show anyone the way HE trades spreads. It would kill it.

    At the San Diego office we trade openings differently than Bright. Hell, we trade openings differently than our Boston ECHO office.

    We all put our spins on market strategies. I just hope my spin is better than yours! :D
    #46     May 12, 2002
  7. Thought about a counterpoint with Darkhorse + time of the month but like Rigel implied don't tell all you know.:)

    Tripack mentioned starwars-''skywalker'':cool: Here's something that made my nite candlechart reading more profitable.

    High priced light bulbs-''full spectrum , 60 watt bulbs. ''Or you can pay $100.00 + for a special sunlight lamp'':
    #47     May 14, 2002

  8. Does it have to do with the population of female traders all getting overly emotional at a certain time?

    jes' kiddin'... :D

    it don't matter how u get the edge- if u got it, milk it baby....
    #48     May 14, 2002
  9. This is a very interesting subject. Great posts so far. A couple points to add:

    It's possible to tell someone your strategy (even tell the masses) and the strategy could still hold up. The reason is that the people you tell don't act on the strategy or believe in it. Look at the internet bubble. Every rational person knew it couldn't last. For the last 100 years in the US, when p/e ratio's start hitting triple digits, when margin debt starts to rise exponentially, when you hear stocks being talked about at cocktail parties, when prices become detached from reality...eventually the market crashes. Parabolic moves up don't last forever. So, why didn't more people sell when YHOO and CMGI were in the triple digits? Here's a case of "backtesting" going back hundreds of years (from tullip mania, the south seas bubble, railroad stocks in the 19th century, etc).

    I agree that if you tell people about a shorter term strategy, and you think people are going to act on,'re only hurting yourself in the process. If the strategy is to "buy the breakout at $30", do you want a 1,000 other guys with buy orders at $30.01 to push up the stock? Then you end up getting filled at a higher price, you sell at a lower price and your strategy starts to get weakened. I suppose for truely liquid stocks like CSCO, the QQQ's etc you aren't hurting yourself as much as thinly traded issues. It's like telling people about gold deposits you discovered in nevada. It creates extra competition and drives down your profits. If you have a secret, keep it.
    #49     May 15, 2002
  10. for us newbies, some of the concepts, Nitro, Dark Horse et al are making were cleverly analogized by Nasim Taleb. He (in his book by the above title; ps I am NOT advocating the book) contrasts financial markets to a giant urn filled with thousands of black and red marbles. This is the typical math/probability example used in school whereby you determine the relative mix of red and black marbles by random sampling of x number of marbles at a time. Pretty soon you will know within some margin of error the ratio of black and red marbles.

    Traders when backtesting for repeated patterns incorrectly view the price and volume data as an urn with a static mix of marbles. In fact there is an elf taking marbles out the bottom of the urn and replacing them constantly so as to alter the data. Likewise over short time frames you will find some stability in backtested results, but the patterns are slowly and constantly changing by virtue of the actions of the market participants. Anyone remember the famed quant group at Morgan Stanley in the (early 80's?) and many others like them? They made millions for a few years and then blew up. Quants these days are highly aware of this, or maybe I'm just losing my marbles...:D
    #50     May 24, 2002