- Some edges may strengthen when followed by many people, and that’s how penny stock promoters are able to pump and dump penny stocks. They need masses to trade in one direction at a time. - Some edges disappear forever, for example certain types of arbitrage. Some hedge funds know that those edges won’t come back and shut down solely due to erosion of arbitrage opportunities. https://www.google.com/search?q=arbitrage+hedge+fund+shuts+down Another example may be TSLA range and high vol edge that may disappear one day. - Some edges disappear forever or often because they were never edges. For example Optionsellers got wiped out thinking they have an edge on NG options. - Some edges always remain or come back often enough to make Jim Simmons and Rentec filthy rich.
When there is famine, you'd better have an edge to fight for limited supply of food and water. Having an edge means you are smarter or a step ahead of other traders. market is very huge. So you don't need to have an edge. If market is very tiny (and you shouldn't be trading in the first place), you'd better have an edge. You just need to know how to read charts. You just need to know how to choose the appropriate financial instruments. You need to recognize continuation and reversal signals, and enter promptly without hesitation. Then let lots of money fall from the sky.
Believe it or not. Setups, strategies or edges NEVER disappear. The reason why you fail to trade your setup is because you fail to apply it properly. Some setups only work well or consistently under certain market conditions (i.e. top, bottom, uptrend, downtrend or sideway. What makes it more challenging is that you also have to distinguish whether these phases belong to short term, medium term or long term time frame.) The bottom line is just don't blame it on anything else if you can't use it. lol
Yup. Hedge funds and prop firms never shut down. Old timers make a killing the same way they did 20 years ago. Algorithms that consistently trade on the same setups continue to work without losing. Profits just keep flowing in for everyone who sticks to any setup or strategy, daily. All true.
Traders who haven't spent many thousands of hours and for years to discover setups/strategies won't appreciate and understand my above statements. All these unsuccessful traders hear is stories upon stories about wall streets without being able to tell why those people/firms actually failed. Some algos that might work well during top or bear market will suffer heavily in current bull market because many traders or firms trying to catch a top during recent years lol.
This may be true in some cases, but don't lose sight of the fact that edges derive from actual buying and selling activity by actual players. Some random pattern that you data-mined from the last three months may well continue for a few more months into the future; it's very unlikely that a pattern from 1936 will work today, as the underlying market dynamics and set of players are utterly different. This is actually one of the mistakes invariably made by naive retail backtesters: they expect an edge to show up consistently on 5-minute data going back twenty years, or daily data going back fifty years, and believe that mining through an enormously long history increases their odds of finding something.
The way I view it: Let's look at what happens with crowded edges (alphas) in simple directional trades. When someone or something places a trade based on a signal, it will impact the price, so that (if trade was large enough) the next entity (person or algo) to enter on the same signal has to pay a for them worse price. So how about "self reinforcing" edges? Momentum strategies must have those right? What is "working better for you" is most likely not working better for the ones last to enter... So if you're early you make money, and it's even the more entities are trading and entering after you! Does this mean there are no momentum edges where crowd behavior is beneficial for everyone involved? This really depends on how long time spans and is a matter of definition, I think. Consider passive investment crowding into FAANG stocks or indices. Because this occurs over a time scale of months or years, anyone who desires to can exit with their bag of outsized returns whenever they wish. Dumb money or money too big to exit are of course the most likely bagholders when things do reverse. And then we have the separate discussion in the same thread about whether edges naturally disappear and potentially reappear. Yes many of them do, because market participants evolve.
Trying to find something simple enough that works always, better or worse at times is my search. Close i think but could still be 5years out, things change its a pain.
Good post dozu888, Go more into detail why you think backtesting is not a good thing for trader to do. Because I do backtesting and forward testing alot. Please more thought on this subject. Share the pros and cons of backtesting. Thank you,