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.

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.

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.

I would suggest starting here: why do you believe the edge existed in the first place? What evidence are you basing that on?

Mike

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

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

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?