What constitutes edge / why is my system working?

Discussion in 'Trading' started by radiusvector, Dec 28, 2017.

  1. Some background: I am no quant PhD, and certainly no hedge fund guy. I am just an engineer with decent programming skill.

    I have spent a small part of the last 2 years developing and building a pretty simple intra-day trend-following system (fully automated) focussed on currencies. No fancy indicators, just signals based of when price exceeds a simple moving average. After a bunch of backtesting and paper trading, I'm seeing that it actually makes good return and I just started live trading with it.

    BT results: Sharpe > 1.7, with tight stop losses.

    While I was happy, I was also quite suspicious to see this working as well. Can someone help me intuit how such systems work?
    • What are the market forces making this system work?
    • Is this effectively taking money from less sophisticated traders? Or, am I riding the wave with smart money who just don't mind taking smaller losses which are actually quite meaningful for retail traders?
    • Why haven't hedge funds/smarter people arbitraged or sucked the alpha out of my system?
    • I've read Ernest Chan's books and it seems that this might be related to 'capacity' but I am still not sure why it is actually working.
    Thanks in advance.
  2. qxr1011


    reminds, me a question someone posted on one Russian forum: How to proof to myself that my wife is not a whore? :)
  3. cafeole


    Why not go on Chan's blog and ask them?
    777 likes this.
  4. So, what's the bottom line ...throw some return percentages out there -- alot of people talk a big game, but they only generate matching market returns at best in a good year... when it's all said and done from their big scientific smart-sounding presentation.

    My fart has more depth and complexity and rewards than some people.
    Last edited: Dec 28, 2017
    PennySnatch likes this.
  5. Sharpe 1.7 - returning 100% a year for the last 2 years when trending (it is a trend follower, after all). Around 30% prior to that when the assets I was trading was not trending.

    RE: asking on the blog, I would, but was hoping some of the intraday/retail traders here (clearly there are many successful ones) who would offer some perspective.
    Last edited: Dec 28, 2017
  6. rb7


    How much time have you been live trading?
    How many live trades have you done so far?
    Backtesting results is a good start but finding a profitable system is a long journey that can be painful.
    JamesEM and 777 like this.
  7. I started with FX about 5 years ago, mostly hand trading, breaking even and going nowhere.

    With this system, I paper traded for the last year on a demo account, and started live trading recently when my paper trading results were pretty darn close to my backtest outcomes.
    JamesEM and VPhantom like this.
  8. rb7


    Backtesting is one thing.
    Paper trading is another thing.
    Real money trading is the real deal.
    The first 2 don't guarantee that you'll make money with real trading.
    After a year or so of real trading, you might re-ask yourself your original questions, if you still make consistent money. For now IMO, I think it's too soon to conclude on your system capacity to make money.
    For now, enjoy (while it lasts!) and hoping for you that in 1 year you'll still be as glad as today.
    Best of luck!
    ps0013, bellman, VPhantom and 2 others like this.
  9. Alright fair. Thanks and looking forward to the next year!

    In case it works, I'll still have the same questions, i.e where is the money coming from amidst other things :)
  10. Sprout


    Taxonomy of Trader Types via Harris is a well-defined universe of traders.


    This chart is missing the updated classification of ‘Futule Traders’ which is most likely who’s trades you are deriving your profits from.
    #10     Dec 28, 2017
    JamesEM, VPhantom, sle and 5 others like this.