Why in the world would any trading setup work?

Where are the mathematical imbalance in the price that manifest every time.. back from the 70s ?
Please give me a hint.

After skills, hardwork, and knowledge: Chance and Luck!

Note: Questions that are too long can sometimes be convoluted, like a tangled cassette tape.

So, this is my take on things... I have been trading since 2008. I have tens of thousands of market hours.

The market is only "locally" non-random. So, for example... After NY open, there are 2-4 whales operating in the market trying to dominate the pattern in the first two hours... Their behaviour will begin to make sense. But when they leave for lunchtime... The market changes again as you have different participants.

Also, if you trade large size, they will notice your behaviour and what you are doing and may adjust what they are doing based upon that. Take advantage of my behaviour; I change my behaviour...

What a great question! It is something every market participant should think about.

That is an excellent question, good that it has resurfaced.

My answer derives out of your assertion that it does not apply to value investing: Finding undervalued companies is a setup/edge/pattern/rule, just one fundamentally rather than techically based. The point is that it is based on an essential truth of human nature - that investors habitually undervalue businesses just going through a bad patch (as opposed to being structurally wrong and inevitably going bust - knowing that difference is part of the value investor's skill); and they habitually overvalue businesses riding a wave. It's a manifestation of human fear and greed emotions, and emotionally detached rational value investors can profit from that. Absolutely.

Now let's take a simple technically based strategy: follow the trend. If a market is observed trending up, you look to buy on dips; and vice-versa. Just as simple conceptually as value investing. The underlying essential truth of human nature here is that traders habitually chase price up and down - greed and fear again, really. A skilled technical trader who can tell the difference between a trend and random gyrations (analagous to a skilled value investor who can distinguish between a bad patch and a structural failing) can make money. It is a genuine edge, just like seeking fundamental value is.

Because both are based on essential human behaviour, they are not easily arbitraged away. Such behaviour is persistant because investors/traders as a whole act in a relatively consistent way with respect to their emotions. Thus, I would certainly say that there are technical methods that can produce consistent and enduring profits, but you need to be able to do all of: really understand what is generating the underlying edge; structure an appropriate trading strategy to take advantage of it; and execute that strategy with discipline, consistency and excellent risk control over an extended period of time.

None of that is really any different to how a successful value investor would go about exploiting observed value. The clever bit is having the emotional detachment and executional discipline to extract the profit that is there for the taking. The problem, of course, is that most of us can't manage all of that, we're just too emotional and ill-disciplined beings at the end of the day, and so we see most investors and traders not making a good profit. The problem mostly lies in the investor/trader, not in the setup/edge/pattern/rule. Those are my thoughts, anyway.

A trading setup works because the behavior of market participants often follows similar patterns. While many traders may use the same strategies, their mindset, risk tolerance and decision-making processes can differ. Emotions like fear, greed and pressure play a significant role, often creating patterns that repeat over time. So, even though many strategies are widely known, the ups and downs of the market and the variety of people's behavior help make them work.

No personal opinion expressed, but here's what my favourite Ai Assistant says:


A trading setup can work for several key reasons:

1. Exploiting market inefficiencies: Effective trading setups identify and capitalize on temporary market inefficiencies or imbalances in supply and demand.
2. Psychological factors: Many setups work because they anticipate and exploit common trader behaviors and emotions, such as fear, greed, and herd mentality.
3. Cause and effect: Successful setups are based on understanding market dynamics and predicting how certain events will trigger predictable reactions from other traders.
4. Momentum and trends: Some setups work by identifying and following established market trends or momentum, which tend to continue due to various factors.
5. Risk management: A well-designed setup includes proper risk management, allowing traders to potentially profit even with a relatively low win rate.
6. Consistency and discipline: Trading setups provide a structured approach, helping traders make more objective decisions and maintain discipline in their trading.
7. Adaptability: Effective setups are often flexible enough to work across different market conditions, allowing traders to adjust their approach as needed.
8. Statistical edge: Over time, a well-tested setup may provide a statistical advantage, even if it doesn't work in every individual trade.

Good topic, but to me the following question is really the only interesting one that you ask:

And I'll answer that with reference to a list of six character traits, which according to research are shared by all elite traders (in an institutional context):

 

1. Sustained focus: Elite traders demonstrate the ability to maintain deep concentration and fast thinking capabilities.
2. Originality and creativity: Successful traders exhibit unique thinking, allowing them to identify patterns and find new sources of advantage in the markets.
3. Willingness to learn from mentors: Top traders actively seek knowledge from other successful traders and mentors in the field.
4. Emotional resilience: The ability to handle losses and use them as opportunities for growth is crucial for trading success.
5. Attention to detail: Elite traders pay close attention to the intricacies of trading, which helps them structure trade ideas, determine entry and exit points, and manage risk effectively.
6. Continuous drive to improve: Successful traders consistently strive to enhance their skills and adapt to ever-changing market conditions.

To me the absolutely most essential point of these is originality and creativity. Why? Because, as you say, edges stop working, and what successful traders do is to find new edges, which very likely are unique to them. And which is what I have done again and again, which is why I continue to be consistently profitable. And which is also why your assumption emboldened above is not true.

The second point I'd like to highlight is willingness to learn from mentors. Over the years I've received numerous unsolicited requests for assistance. Most of them want me to tell them a system to trade. Apart from the fact that those encounters have generally ended in a less pleasant way, I'd say the reason for the failure of these people is that they are not willing to be continuous learners, even with instruction. They want to be handed the secret sauce that is going to enable them to make an easy living, and most of them think they are entitled to it. And this point about willingness to learn applies to my own continued success: I continue to learn and learn, and develop strategy after strategy.

Finally I'd like to mention attention to detail. Why is this important? Because even if you are being given a profitable strategy, trading it successfully requires an attention to and understanding of a level of detail that few care to attend to, learn or develop.

To conclude, I would recommend all prospective traders to consider these six points before they think seriously about making a living from trading. Setups that work are only a small part of the puzzle.

If it takes 10 years of committed research work to develop one trading strategy with an edge. Is it possible to spend another 10 years to develop a second trading strategy just in case the first strategy don't work anymore while trading this first strategy?

Logically and practically no.

This talk about continually improving this first strategy, the question is what's the reason that says this first strategy developed from 10 years hard work is not good enough that necessitates this improvement and what specific research work are you doing now for this improvement?

Cheers

A setup works only when you work. Build the statistics, the awareness to see when its coming. And more importantly, when it is not coming.

The creativity in building or testing a method infuses with discipline to create your glasses. I recommend back testing 300 trades with the same criteria for your brain to pick up on the strategies edge to gain an understanding.

That’s a solid question! The thing is, even if a strategy or pattern is widely known, it doesn’t necessarily mean it’ll get arbitraged away. Markets are dynamic, and human behavior (like fear, greed, and reaction to news) constantly creates new opportunities. Plus, no two traders execute the same strategy the same way. Timing, risk management, and psychology all play a huge role in turning a pattern into a true edge.

That doesn't resonate with my experience at all. How long it takes to build something depends on how many tools you have in your toolbox, and what materials you have available. Strategies can appear almost instantly simply by making a formerly unseen connection. And sometimes it takes six to twelve months. In my experience. And that pace is necessary if one wants to keep up with the changing markets.

Or one can settle for something more robust that is less vulnerable to the shifts and changes. Personally, I like taking advantage of patterns that may only last for a year or less. Less robust but more profitable.

for me trading is like playing a esl in cs go, no matter how better u think u cant perdict the opposite team and not some stradegy will work always because they are human the can see and adapt to these stradegy and same thing apply to trading