Can a system stop working when many people use it? | Forex Factory

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Can a system stop working when many people use it?

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  • Can a system stop working when many people use it?
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  • #1
  • First Post: Jun 3, 2008 2:27pm Jun 3, 2008 2:27pm
Can a system stop working when many people use it?

That is a question that I have since I started in forex. I don´t know if the use of a good system for many people, can cause certain reactions in the market and finally become a bad system.

What do you think?

Greetings!
  • #2
  • Jun 3, 2008 2:39pm Jun 3, 2008 2:39pm
.
Quoting Darkstar
Depends on your method I suppose.

A real honest to goodness trader’s edge should provide you with a way of looking at capital markets to discover inefficiencies. Sharing the edge you actually have is gold, but seldom is anyone interested in trying to understand what makes you profitable. So you can share it all day long and it doesn’t make the slightest difference to your profit. When one inefficiency dries up, you can use your edge to locate another one with little difficulty.

Pointing out the inefficiencies will usually destroy their profitability in short order. For an example you can look at news trading. Up until about 6 months ago, there was a gaping hole in Oanda's execution system which allowed a trader to get guaranteed fills on orders during an announcement. A small group of people were making some serious bank exploiting the hole until a few idiots decided they needed to prove to the world how smart they were by showing everyone else how it was done. The army of people flowing into the trade led to a widening of spreads and the death of that inefficiency. I imagine people still make some money trading the news, but not in the same way and the profit is nothing like it used to be.

Most systems being traded have no component of inefficiency to them and as such, no real edge. Almost all of the moving average and other derivative indicator based systems fall under this category. Some methods can be shown to be statistically profitable looking at historical data, but very seldom are they much better then chance (1-5%). Given a large enough sample of data they almost all break down. The reason for this is that the underlying order flow these systems need to win isn't generated by these systems. The likelihood of even 3 traders looking at the same combination of indicators and trading them exactly the same way is almost nil. The moral of this story is that sharing these systems will often have the effect of INCREASING their profitability (albeit marginally) because the effect on the order flow of more people trading at the same time in the same way causes the system to work. Unfortunately the most likely traders of these systems are novices and seldom follow the system exactly or for very long.

Fibs and long term (1hr+) price action system work for the same reason indicator systems fail. The concepts are SO pervasive within the trading community that the core patterns almost always generate order flow that helps them to work. A breakout doesn't work because it's a breakout, but because many people see the breakout and act in the same way. It's with these types of systems that exits become the critical component to success. Lots of people are entering at the breakout, but only the successful have back tested/forward tested different exit rules to determine the probabilities for the best exit. This data provides the winners their edge. It's a smaller edge then an arbitrage situation may provide, but it is still tradable for a decent enough profit.

It's for this reason you find a lot of information about entries but very little for exits. If the exits are what provide the edge, sharing that information will hand a portion of that edge over to someone else. Enough some ones and the profits are gone.

So to make a long explanation short, if the system you’re trading actually has an edge, sharing it will be detrimental for you. If it doesn’t have an edge, share away because it may actually improve it.

Ohh, and if you do manage to find a real market inefficiency, do yourself and those who are already trading it the courtesy of keeping your mouth shut about it. The shiny red Ferrari it will buy you will boost your ego for much longer then the complements of your trading peers.

Luck be with you.
  • #3
  • Jun 3, 2008 2:47pm Jun 3, 2008 2:47pm
Ohh, and if you do manage to find a real market inefficiency, do yourself and those who are already trading it the courtesy of keeping your mouth shut about it. The shiny red Ferrari it will buy you will boost your ego for much longer then the complements of your trading peers.

Luck be with you.



AMEN
  • #4
  • Jun 3, 2008 6:45pm Jun 3, 2008 6:45pm
People don't post good edges on forums.
The breaking of a wave cannot explain the whole sea.
  • #5
  • Jun 4, 2008 5:56am Jun 4, 2008 5:56am
my system always works for me. as indicators will shows you what to expect.
  • #6
  • Jun 4, 2008 7:05am Jun 4, 2008 7:05am
I don't think posting any sort of system on the forums will have any effect on the currency markets because none of the significant market participants read the forums. They already have their own established styles of trading. The oanda example given by darkstar is different as it is pertaining to a specific broker only. And also making profits is largely dependent on the trader rather than the system or strategy.
  • #7
  • Jun 4, 2008 7:51am Jun 4, 2008 7:51am
I see 4 outcomes.

1. Share system and it keeps working - You receive the praise of others and you continue to profit as you did before sharing. No extra benefit to the sharer, financially than already received before sharing.

2. Share system and it stops working - You receive praise from others until they realize it no longer works, then they say you are a scam. Also, you lose a profitable trading method. A loss to you financially and emotionally.

3. Don't Share and it keeps working - You continue to be profitable with the system. No one knows about it, so no one is upset that you have scammed them. A financial and emotional gain to you.

4. Don't Share and it stops working - You have made a profit for a while and you do not have to defend a system that no longer has an edge. No loss financially and no emotional investment.

Based of these 4 choices, it is obvious, that not sharing is the logical and financial and emotional best choice.
  • #8
  • Jun 4, 2008 9:13am Jun 4, 2008 9:13am
i think that makes the most sense. it's not easy to find a profitable system, so after a long, hard search, it's human nature to keep it to yourself. this is a zero-sum game, so one has to have his own edge to win. no teamwork here, unfortunately. though i've seen a lot of experienced traders giving wisdom, but working systems aren't given free.

good thread... makes me wonder... if a "holy grail" was followed by 90% of the traders, what would the market look like? spikes all over, yeah?
  • #9
  • Jun 4, 2008 10:30am Jun 4, 2008 10:30am
Quoting good
I don't think posting any sort of system on the forums will have any effect on the currency markets because none of the significant market participants read the forums. They already have their own established styles of trading. The oanda example given by darkstar is different as it is pertaining to a specific broker only. And also making profits is largely dependent on the trader rather than the system or strategy.
the "gaping" whole was not just oanda as a broker. Just search around on these boards, and many others for the quick change brokers made. Quite fascinating, but not for those trying to trade it
  • #10
  • Feb 23, 2009 11:01am Feb 23, 2009 11:01am
smjones
always looking at all possible outcomes!
  • #11
  • Feb 23, 2009 12:23pm Feb 23, 2009 12:23pm
you can share a system and it might stop working, but it won't be because of a ton of people trading it. the only way that would happen is if everyone in the market, including banks and institutional traders, started taking the same signals you did. that would leave no one going the other way. then it would stop working. but, even if every retail trader in the world was taking the same signals, it wouldnt matter because first off, most arent actually connected to the real market, so their volume wouldnt really count, and second, they make up such a small percentage of total trading volume it wouldnt affect the market.
  • #12
  • Feb 23, 2009 1:09pm Feb 23, 2009 1:09pm
Yes, if probably 70-90% of all traders use the system religiously.

NO, because every system will be tweaked by a trader to his preference, risk & personality profile. NO, because people (using the system & not) will always make mistakes, & no 2 people will use the same system virtually similarly. In short, human factor is a big factor in this issue.
  • #13
  • Feb 23, 2009 1:18pm Feb 23, 2009 1:18pm
The short answer is yes, one can see this effect for instance in the declining performance over the past years of the statistical arbitrage funds as more people fight over the same edges. Another example would be the amount of false breakouts, everybody climbs in at the same point, no more buyers and the price begins to fade.
The breaking of a wave cannot explain the whole sea.
  • #14
  • Feb 23, 2009 4:00pm Feb 23, 2009 4:00pm
Hi,

It largely depends on the market traded. Some markets which have a relatively small amount of participants and/or limited liquidity can be affected by a new method or system made public.

In FX, the chances that a method stops working are quite small. For the scenario to happen, traders around the world would have to notice certain phenomena related to the "system" and then copy it unanimously.

Even if you shared a "secret" method with ten thousand traders around the globe, the chance of a paradigm shift is very remote. There would also be a question of how much impact the cumulative amount of "small" traders could make in a market which is dominated by huge players most of the time. Hardly any impact at all.

regards
daytrading
Enter Signature
  • #15
  • Feb 23, 2009 6:23pm Feb 23, 2009 6:23pm
Quoting rael
i think that makes the most sense. it's not easy to find a profitable system, so after a long, hard search, it's human nature to keep it to yourself. this is a zero-sum game, so one has to have his own edge to win. no teamwork here, unfortunately. though i've seen a lot of experienced traders giving wisdom, but working systems aren't given free.
I hate to prove you wrong, but I've actually posted not one, but TWO, working, profitable systems for free


http://www.forexfactory.com/showthread.php?t=143250

http://www.forexfactory.com/showthread.php?t=145135
  • #16
  • Feb 23, 2009 6:30pm Feb 23, 2009 6:30pm
this theory is as good as time travel. it could happen but no one can really prove it at all. i have never seen any concrete proof. just conspiracy theories.
  • #17
  • Feb 23, 2009 6:36pm Feb 23, 2009 6:36pm
There is another angle to this question that no one has considered:

IMO, some systems are helped because people know about them. This may not apply to fundamentals, but its almost certainly true with TA items. I may get flamed for this, but I think this is true with Fibo retracements. Whats so special about 61.8 anyways? Nothing other than the fact that A LOT of people know about it and believe in it. So, after a bearish retracement, people believe that a stock/pair/commodity will find support at 61.8, so people buy, creating the same support they believed to be true. Its like a self-fulfilling prophecy for no other reason than A LOT of people believed it would happen
  • #18
  • Last Post: Feb 23, 2009 7:11pm Feb 23, 2009 7:11pm
Quoting LongToBeFree
There is another angle to this question that no one has considered:

IMO, some systems are helped because people know about them. This may not apply to fundamentals, but its almost certainly true with TA items. I may get flamed for this, but I think this is true with Fibo retracements. Whats so special about 61.8 anyways? Nothing other than the fact that A LOT of people know about it and believe in it. So, after a bearish retracement, people believe that a stock/pair/commodity will find support at 61.8, so people buy, [b][i]creating...
Actually, if you read up earlier on, that's exactly what Darkstar was saying many years ago...
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