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Why do trading edges dissapear?
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Why do trading edges dissapear?

  #11 (permalink)
Trading Apprentice
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kevinkdog View Post
Let's say you found out that a 50 bar breakout was a terrific way to enter the market, and a 20 bar breakout (in the opposite direction to your position) was a great time to exit. So, you start trading it, and things are going well.

Word gets out on what you are doing. Maybe you tell people. Or maybe some really smart people somehow reverse engineers what you are doing. Maybe others discover your approach through testing.

So, in the beginning, people will probably trade your exact method. So, let's just say when you entered an order before others caught on, and your small 5 or 10 lot was easily absorbed by the market. But now, maybe 1000 buy orders are all hitting the market at the same time. What happens? There aren't 1000 sellers at that price, so something has got to give. The price moves up to fill those orders, giving most people a slightly worse fill. Same thing on the exit. So, your system may still work, but is not as effective.

Then, over time, people figure out ways to "jump in front" of your signals. Maybe it is a 48 bar breakout they enter on, or something where you now board the train after it left the station. That will degrade your system too. Or maybe it is someone with a colocated server, who just jumps in front of your order by microseconds. Or maybe someone burns the code on a board, so its signals are generated a microsecond before yours are.

So, what will you do? You'll probably change your approach in response. You'll adapt, maybe slightly, maybe dramatically.

In that respect, the market never changes. Each participant in the market is always trying to beat the other participants, whether they intend to or even realize it. That has always been the game.

Outstanding answer, Kevin.

I've witnessed this very thing happen to traders especially those who flock to the latest and greatest hot performing trade call services or indicator based setup which were touted by others. And interesting to note those services traded in thinly instruments with very high volatility such as crude oil, DAX, Mini Russel 2000, and E-mini S&P MidCap 400. They were sitting ducks for edge evaporation.

My suggestion to somewhat mitigate this is to only trade the most liquid instruments, such as E-mini S&P 500, 10 Year U.S. Treasury Notes and Euro Bund.

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  #12 (permalink)
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kevinkdog View Post
Let's say you found out that a 50 bar breakout was a terrific way to enter the market, and a 20 bar breakout (in the opposite direction to your position) was a great time to exit. So, you start trading it, and things are going well.

Word gets out on what you are doing. Maybe you tell people. Or maybe some really smart people somehow reverse engineers what you are doing. Maybe others discover your approach through testing.

So, in the beginning, people will probably trade your exact method. So, let's just say when you entered an order before others caught on, and your small 5 or 10 lot was easily absorbed by the market. But now, maybe 1000 buy orders are all hitting the market at the same time. What happens? There aren't 1000 sellers at that price, so something has got to give. The price moves up to fill those orders, giving most people a slightly worse fill. Same thing on the exit. So, your system may still work, but is not as effective.

Then, over time, people figure out ways to "jump in front" of your signals. Maybe it is a 48 bar breakout they enter on, or something where you now board the train after it left the station. That will degrade your system too. Or maybe it is someone with a colocated server, who just jumps in front of your order by microseconds. Or maybe someone burns the code on a board, so its signals are generated a microsecond before yours are.

So, what will you do? You'll probably change your approach in response. You'll adapt, maybe slightly, maybe dramatically.

In that respect, the market never changes. Each participant in the market is always trying to beat the other participants, whether they intend to or even realize it. That has always been the game.

Great thank you!

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  #13 (permalink)
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Giorrgi View Post
Thank you for your answers guys. I didn't expect the author of the book to reply to my questions! Saw that you also got a thread specifically designed for that Kevin - thank you, I will post there in the future.





However, the specifics of a given strategy - such as the relation of a pullback to a trend in order to determine whether the trend will resume - vary from market to market and I would think that these might indeed evolve quickly. The performance of your set of rules will therefore change if you don't adapt them. So I guess that this is the "edge" that most traders refer to: the performance of your specific set of rules, not the general principle underlying your technique.


I still don't really understand this propositon.

@Giorrgi

I am attaching a chart from the last 2 days on CL to demonstrate of how I use volume and order flow in my trading. I know many people on futures.io (formerly BMT) thinks volume is useless in making trading decisions, and that Wyckoff was sort of nutter. However, volume/order flow is my main analytical tool for trading, and it works for me.

To me all markets behave in the same way - people buy when they think price is low and sell when they think price is high and panic when there is a large fall. The charts reflect all of this. You can even say that charts are lagging, but it does not lag in the same way as those price derivative indicators so many people love to use when coming up with a trading strategy.

I have also attached a 60 min chart of ES to show that even in 'thick' markets, we get the same thing.

Regards,

Dudley

Attached Thumbnails
Why do trading edges dissapear?-cl-10-15-15-min-28_08_2015_for-bmt.png   Why do trading edges dissapear?-es-09-15-60-min-31_08_2015_for-bmt.png  

Last edited by mrmuggins; August 30th, 2015 at 09:34 PM.
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  #14 (permalink)
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I guess I have two reasons for this...

First, the market is dynamic and keeps changing and may be the edge you had is fading away and you did not notice it...

Second, we tend to try stuff other than what's working for us... I have observed it with myself, if something is working greatly in my way, I tend to deviate to something other than that and end up losing that edge I had cos I tried to manipulate my mindset...

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  #15 (permalink)
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Well generally speaking trends start and end. You can have an edge trading a trend but when it ends you're out of luck. If you go a step further and can account for the reversal your edge has more longevity. The problem is that sometimes volatility changes and internal relationships can change which can make normal trending / reversing behavior into straight chop or monolithic moves. This can throw a monkey wrench into just about anyone's edge who doesn't have the ability to change their time frames because what you'll be left with is chaos on the lower time frame.

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  #16 (permalink)
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Trading edges only disappear if the model is shallow. If the model is deep enough they only disappear if the trader does.

Travel Well
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  #17 (permalink)
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Big Mike View Post
I would suggest starting here: why do you believe the edge existed in the first place? What evidence are you basing that on?

Mike


ratfink View Post
Trading edges only disappear if the model is shallow. If the model is deep enough they only disappear if the trader does.

Brilliant! To the point.

If I may add....

Edge is the foundation. you work around it while the markets fluctuate: Scalp or trend, higher level risk and reward or tight risk and reward. You may chose to trade more contracts or less contracts. If the logic and cash management is good, that is what creates the edge.

I looked at CTAs that have been around over 10 years, and I assure you that they do not change methods every three months. Rather, for the most part what I have seen is a consistent application of the same method over and over.
They have also learned to trade the same during more difficult periods of drawdowns, and this is where most beginner traders fall apart. They can not go through a consecutive set of losses, and still have a belief in their system through its continuous application. It's though to apply the method when the markets eats away your cash, yet this is where the mental strength comes into place and your belief system.

Matt
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  #18 (permalink)
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ratfink View Post
Trading edges only disappear if the model is shallow. If the model is deep enough they only disappear if the trader does.

That's deep bro...

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  #19 (permalink)
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mrmuggins View Post
Markets never change. It goes up. It goes down. It goes sideways. You have small range. You have large range. High volatility. Low volatility. Just learn to trade in each of these instances. Forget about the lagging indicators and just stick to volume and order flow.

Dudley

Are you saying all indicators are lagging?

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  #20 (permalink)
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whtfr View Post
Are you saying all indicators are lagging?

All price derived indicators are lagging - e.g - MACD, RSI, Moving Averages, CCI .... the list goes on. Even price bars are lagging in the time it takes for them to close. The only thing that is not lagging is the orders being transacted seen on the time and sales. However, I cannot trade off the time and sales so will use a price chart, with a GOMI ladder.

Dudley

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