How Does a Profitable Trade System Lose Value when Made Public?

[Iro 10]

I've heard this claim occasionally by posters when they want to criticize other people that sell EAs. They say if the system is so profitable then creators would keep it to themselves, selling it to the public would just make it fail eventually.

 

But my thinking is that would it not be in fact the OPPOSITE? Since trading is based on momentum and psychology more than anything else, if MORE people were using the same system, watching the same timeframe and they all receive a buy signal. This would just lead to a magnified runaway train effect where everyone on the system would buy, causing the price to shoot up, everyone else looking at the sudden momentum will also go "hey let's jump on board" leading to even higher price hikes.

 

Then sell signal comes in, the people on the system will jump ship first, cause the price to go down, everyone else will look at that and go WTF, get panicked and sell, further magnifying the effect. So if anything having more people on the system would in theory make it MORE effective.

 

Thoughts?

[steve46 12]

The prevailing thought is that when a profitable system is public, the participants find that their entries and exits become "crowded'...(it becomes more difficult to get filled and to put size on)

 

As a result, if that system required limit orders for execution, participants might find that they needed to use market orders instead, and that would change the profile somewhat...also at the other end, on exit they might find that they had to lift the available bid earlier....again this would alter the system's profile...

 

Finally as a systematic approach becomes more publicly known, there are those who would be waiting to suck in the retail traders and then take it the other way. The most common example can be seen in the S&P Futures contract. In that market, players like to wait for price to move to test swings high and low...what you may see is that the market will often "take out" that high or low by a few ticks or even a point or so, then reverse back the other way....professionals call this "shaking the tree".....it is also done with just about any conventional indicator in common use (MACD, Moving Averages, Market Profile Numbers, etc)

 

Just a few examples to think about.

Edited April 21, 2012 by steve46

[BlueHorseshoe 10]

Steve's reply above seems to me to be a good answer to your question.

 

However, I would add that a good strategy will exploit a broad market characteristic, so precisely to-the-tick entries and exits shouldn't impact upon its performance too much. There are many, many traders trading end of day entry systems profitably - how many of them are actually filled exactly on the closing tick of the market? Not many. I rely on a specific set of criteria to enter on pullbacks in trends, for example, but there are countless other strategies for exploiting this type of opportunity that rely on different parameters or indicators, thereby giving slightly different entry and exit signals. Coincidentally, I also trade with a variation of a very well known and well publicised system . . .

 

As for the old argument about 'nobody with a good system would sell it to the public - they'd just trade it themselves and become fabulously wealthy', I don't think it's true at all. To trade it themselves the system developer needs to have sufficient capital. If they don't have sufficient capital then it may very reasonably occur to them that selling the system is an obvious way to raise capital. I'd certainly be a vendor if I had anything to sell!

 

I wouldn't become overly concerned with any of this, however. I would try to focus on finding a strategy that you feel offers a robust solution for the market(s) you wish to trade, and is well suited to your own capital and temperament as a trader. I'd then spend most of my energies building execution methods, risk management, and most importantly position-sizing (money management) structures around this.

 

I hope that's helpful.

 

BlueHorseshoe

[karoshiman 10]

You can see this effect Steve describes with famous market anomalies (from the viewpoint of efficient market theory) which worked for several years but slowly lost their edge until there was none compared to a buy and hold strategy.

 

However, it was surprising for me to see for how long some anomalies prevailed. Some very simple strategies outperformed the market for nearly ten years before becoming useless.

[Obsidian 10]

another question comes to my mind...should you really invest in a market which is illiquid therefore 100-200 small traders like us can manipulate. (or does a strategy work in such shallow water?)

[zdo 20]

…selling it to the public would just make it fail eventually…

This is an old ‘legend’ that at one time actually had more basis than now. Way back when, there were few “hot” systems being sold at any given time and the public participation in their implementation could be literally seen as ‘fads’. In the brokerage business (pre–internet days), I’ve witnessed the orders come in bunches for the “hot” system. Much, much more dilution today…

 

The systems themselves didn’t actually degrade. Adding some precision - the ‘rulership’ they were exploiting passed and another one took it’s place. Many, if not most, of these system themselves were still very good (some of them great!) – when applied in the correct ‘rulership’…ie not necessarily robust across ‘rulerships’ but still very good…

… And of course, as the ‘edge’ faded, ‘professionals’ started to fade the orders coming in from those who had committed to the ‘through thick and thin, new equity highs and drawdowns’ way of trading a system. So, the legends have basis … but today much, much more dilution and variability in the implementation of publicly available systems …

 

 

re

…if the system is so profitable then creators would keep it to themselves…

It’s pretty safe to say that truly excellent systems are never made available to the public at any price. Compared to just trading it, marketing and supporting it is simply not worth the hassle ! ...

It’s also pretty safe to (generally) say that the ‘robust’ systems – the ones that do continue to profit through multiple (but never all, btw) types of ‘rulerships’ are really not that ‘valuable’…

ie they aren’t really innovative

ie you don’t need to buy them. You can just roll your own and do well - provided you are ‘unadventurous’ and patient, etc. enough to stick with it…

 

jmo based on extensive anecdotal experience on both ends of the systems for sale bs

[SIUYA 11]

in a similar thread of Zdo....

In an any efficiently operating system, any industry/business/system that can get excessive profits will likely be degraded by regulation, degradation of the resource or erosion of the margins by more competition.

On this basis then regardless of if the public get hold of it, most systems are likely to be naturally degraded.

 

So you may as well sell the system while it is hot!

 

in other words - nothing works all the time to create excessive/abnormal/above market returns.

Hence the recurring theme of learning to trade, being flexible, understanding context the instrument and system you are using are still paramount.

 

Profitable systems dont often profit out of a free arbitrage or undiscovered secret. They profit because they are very well suited to maximise the opportunities for a particular type/phase of market conditions....these conditions can change.

[zdo 20]

How Does a Profitable Trade System Lose Value when Made Public?

ya’ll correct me if I’m wrong but it seems that basically the posters are saying the systems don’t “lose value when Made Public” - they weren’t really objectively valuable to begin with…

 

… and that. subjectively, their ‘value’ was largely in the anticipatory affect and that the reality of / when implementing them wipes the ‘value’ luster right off…

 

 

So you may as well sell the system while it is hot!...

Systems For Sale - a veritable warehouse

[Trader1 10]

if every one would get a buy signal then who would they buy it from? because there would be no one willing to sell at any price:) the only way you can get a profit is if someone in the lack of better judgement would be willing to sell to you now and price would rise shortly after, that person will only do that if he or she thinks that price will continue fall, right? obviously that would be harder to make money if more traders are not willing to sell to you, the effect would be that price would not drop or rise as much as it could have done otherwice if the counterparts where all more or less without clue. if more people are selling and you want to buy, the more price will fall and the more money you will make when price finally reverse and go your way, thats the way we want it, so the fact that revealing a profitable system would make it less profitable, have something going for it. in a very liquid market such as Fx with over 3 billions traded each day, it can be discussed if it would have any effect at all, because the number of traders are allmost unlimited and the chance that a big percentage of the fx traders would use the same system is very small, unless it's something unbelievable exeptionally good, but with a trading system for stocks and other less liquid instruments, there might very well be an impact on the systems profitabillity if revealed to enough people.