I have not read too much of this thread, but I have an opinion for ANYONE who says the market can't be beaten, the best way to play the market is buy and hold, daytrading is too risky and doesn't yield anything in the long run, etc. etc.: How are all the people who run around at the exchanges making a living? Does the independent little option market maker who has $50k to put up not beat the market? Is he paying for his seat AND making a decent living by NOT beating the market, i.e. making less than 5 or 6 grand a year?
Excellent point. This is one reason why I don't use the war metaphor. To me trading is more of a game. If I were to view it as war, then I would still have to view myself as being a gnat buzzing around the warrior's face than of being a warrior myself... Maybe if I were trading a 100 million dollar account then I could possibly call myself the drummer boy. I have always found it comical to hear one trader on ET tell another trader that he is going to take his money. LOL - yea right. I've often considered replying with, "and what do you plan on taking it with, a gun or do do you think that just ego will suffice?"
one rationale is: don't use stops. don't use specific patterns. pick 'generic' stocks, and match it against a buy and hold. traders don't do this, but some studies have. another is the studies don't focus on the winners, but the losers. if you start with 100 people, and 10 make money that first year, and they CONTINUE to make money each year after that, it doesn't become the right end of the tail. but if you i've done studies in baseball regarding the predictive value of clutch hitting (at best: negligible, at worst, none) and those people who are best at clutch hitting (relative to the rest of their performance) one year has virtually NO correlation to the same results the next year. however, if you look at a group of successful traders, you'll find a correlation to their performance next year. that's the second part of the study that SHOULD be done, and isn't....
Answer below in my article "Capital Ideas & Efficiency: Understanding today's academics debate " (full article here http://www.econometric-wave.com/) "Efficiency is a statistical point of view and it concerns the majority. In fact, according to Peter Berstein - in his book "Capital Ideas - The Improbable Origins of Modern Wall Street 1992" - Fama himself has quoted a study that shows that some specialists market makers on the floor were able to make profits nearly systematically by buying near the low and selling near the high. That's exactly what our model can help to do without benefiting from special conditions of being such a specialist."
Of course buy and hold has worked historically. Look what has happened to stocks in the past 70 years. But that's just meaningless hindsight. You can still easily buy at a long term high, and get screwed bigtime.
A market maker is not dependent on the market efficency as much as any medium term trader. There are clear studies about some autocorrelation on under-a-minute time scale, which the MM's explore. Electronic markets will bring this advantage down to zero in the near future. In addition, market makers have the advantage of seeing the both sides of the market.
Lobster, Local's and MM's have a huge transactional edge.The percentage of floor traders who have successfully migrated from the pit to the screen is probably no higher than the success rate of the total trading population. Using floor trades as an example of how certain participants can beat the market is like saying that Steve Wynn is a model of how someone can get rich in Vegas.
Yeah many pit traders have been out of the game in France when the Open Cry has disappeared this means they benefited from this edge. Statistically it is difficult to disprove market's efficiency by using statistics of SOME successful traders not only because of the tail of statistical distribution but also because of Levy's law persistency of chance - as I have mentioned in another post. Also efficiency is different concept from randomness. Nevertheless absence of statistical significance doesn't mean proof since statistical inference is like a criminal investigation: you declare a suspect as innocent as long as you can't find proof, that doesn't mean that he hasn't really commited the murder he is suspected of. Now imagine that it is really possible to demonstrate market's INefficiency - also it depends on the definitions because they are CONTRADICTORY definitions - what will be the consequence . Efficiency can only exists if there is doubt. That's why I will never do this formal demonstration even if I could .