Is this the reason why you don't want to share your Holy Grail?

Holy Grail in Forex has been found. No doubt. Both manually and automatically. Manually, I've seen someone giving signals for more than 10 trades with 100% accuracy. Automatically, I've seen someone developed a money machine through expert system (not expert advisor), which involves API programming (direct broker's data feed farming), Artificial Life so the system can learn from mistakes, neural networking, and non-linear algorithm.

The Holy Grail has been found, or at least a few of you have found a very profitable trading system. The question is: why are you not sharing it with anyone?

First blatantly obvious answer is that you've spent tens of years finding it and developing it and feel it is too valuable to share. That's only fair and you have every right to enjoy the fruit of your labor.

My first thought is that, don't you think if majority of people are using your system, the system becomes a self-fulfilling prophecy? Support & Resistance, Elliot Wave, Fibonacci don't make a scientific sense at all. Why can't the price of an asset go up or down further than a certain past limits? That is because majority of people are using the price of the past to act the future. All common indicators become self-fulfilling no matter how strange the concepts are. The more people are using them, the stronger and the more accurate the signals become.

So going back to my question: are you not sharing your profitable system because you feel it is too valuable to share, and that if you share them, you think that somehow your portion of profit will be less? Or would you consider sharing them (and it is only fair if you charge people for a profitable system, but free distribution can only work to your benefit) and get the mass support to make your system becomes more accurate due to self-fulfilling prophecy?

I don't see how a Holy Grail is possible. Some reasons:

1. Markets are ultimately driven by orderflow. Even assuming it's possible to know exactly what orders are currently in place, and at what levels (the 'order book'), there are always more orders about to be added that traders have no knowledge of. These orders are created by a host of different factors, that are too diverse, complex and abstract (e.g. sentiment) to be calculated precisely.

I recall reading a good anecdote in a Mark Douglas book, that went something like this: A capable analyst who was hired by a firm. The analyst explained to his new boss how he could predict turning points by using support and resistance levels. When soybeans price reached a major support level, his boss said to him "OK, what you're saying is that price can go no lower, right?" The analyst said "Absolutely. This is the low of the day". His boss immediately picked up the phone and said "Sell two million beans at market", and within 30 seconds, the soybean price had dropped another 10c. The boss said "Now where did you say price was going to stop? If I can cause that, anybody can".

In short, the market is a mix of anonymous participants with unknown agendas. It takes only one large order, or one 'black swan' event, to upset even the most 'perfect' technical strategy.

2. Political and economic events, and 'acts of God' can have a cataclysmic effect on markets. For example, to be able to trade with 100% accuracy, you'd need to know when earthquakes or terrorist attacks are going to occur, and what their precise effect would be. The same can be said for the outcomes of other major economic news (e.g. non-farm payroll, interest rate announcements, the FED Chairman speaks, etc). Again, to predict price movement with 100% accuracy, you'd need to know the outcome of these events ahead of time, and what their precise effect is going to be.

3. Big funds have multi-million dollar R&D budgets, and can afford to hire the smartest analysts, economists, math professors, veteran traders, and IT experts. The performance of these funds is less than perfect; if these smart folk can't design a 'Holy Grail' system, what hope is there for anybody else to discover one?

4. If you read the trader interviews in the Market Wizard books, all of these billionaire/multi-millionaire traders emphasize the importance of managing risk. If they had a Holy Grail system, risk management would be largely irrelevant.

5. Markets frequently change their 'character' over time. A Holy Grail system would need to know how to adapt, and in advance. The AI systems that you mention base their predictions on existing data; they can't work with data that hasn't occurred yet.

6. The only perfect systems, by definition, involve some form of arbitrage (guaranteed positive return at zero risk). These systems do not involve technical or fundamental analysis. An example of such a system would be one that finds an imbalance that must be immediately corrected, out of necessity for that market to function effectively.

As distinct from a Holy Grail, I do believe that it's possible to develop a "very profitable" trading system. In terms of whether sharing a winning system will damage its effectiveness, here is a good post by Darkstar that deals with that topic.

[EDIT] Finally, I doubt that many market wizards are going to be interested in sharing their strategies on forums like this. Not necessarily because they lack community spirit, it's just that there's no reason for them to do so. Some of them are possibly so dedicated to their business of making money, that they don't even know that Forex Factory exists (sorry, Twee ). Forums are largely the playground of trading wannabes who come here in the hope of learning something from their peers.

David

The system is inefficient. To be consistently profitably means that you have found where the system is inefficient and exploiting that failure.

It's a bit like if you can hack into an ATM to get free money. If you're discreet, you may have a very good side income or even never work a day in your life again. But if you go out and tell everybody, the bank will plug the loophole.

If everybody traded the same method, that method would cease to work, it's as simple as that.

hanover is right, it's future order flow, you can't predict if Joe Blogs is going to put 1bil lot size then 5 seconds later dump it at a small 1pip loss or any other variable.

But as most of the order flow is automated, Joe Blogs tells a computer to stealth buy 1bil lot size slowly then the computer system effectively creates momentum which is exploitable, or how ever the system is programmed to fill it's order.

People also move the market ofcourse, but if the market runs into a level strong and stalls followed by reversing the only answer would be a computer system, a human would let the momentum continue, but then it wouldn't have buyers to sell to the price would go higher then move down so maybe there smarter than that and sell into strength as we see all the time.

But ultimately there is no grail and the 100% call is well lying to you.

It seems to me that sharing a successful system would kill it because of liquidity at a point of time.

Again, assuming a system is successful, then it would throw the same entry and exit signals for everyone trading it. The problem is that these orders would all show up at the same TIME.

While people may tout the Forex market as being the most active and having the highest level of liquidity, the amount of liquidity at any point in time is limited...not infinite.

So if you're a successful trader and you're putting on a position size of 150 lots whenever the signal shows up and then closing that position (putting in an opposite order) every x-number of pips later, then you're chewing up 150 lots of liquidity on each side. But what happens when you give away the system?

Well you might have 30 "disciplined" guys trading the system too with a couple hundred people who are not disciplined putting in orders at the same time as well....just not on EVERY signal.

Now if ONE of these guys has a big bank roll and is looking to put on a position size of 3,000 lots....and he has his trade manager essentially break that 3000 lots into 20 separate 150 lot orders, and he floods the market with them along site your single 150 lot order and the smaller orders of the 30 other guys who are "disciplined" plus a couple dozen at various sizes from the not-so-disciplined traders....what's going to happen?

The available liquidity at the point-point-in-time of your signal is going to decrease "enough" to negatively impact the system. You end up getting surprised that instead of your order being filled within 0.5 pips of where you saw it last when you clicked the "buy" button (as you were used to), now it's being filled all over the board between 0.5 and 3.5 pips. If your strategy is targeting between 15 and 25 pips, this can cause a major impact on the overall success of the system. Especially if your exit signal is simple. Like just say it's a 25 pip take profit target. The guy looking to work 3,000 lots read your system post on the forum and just changes his take profit to 23 pips and now he's chewing up all the exit liquidity too. Now you're getting filled at a higher price than you want and your Take Profit isn't getting hit at all because others are pushing price back down "just enough" to turn some of the winning trades into losing trades because price comes just one or two pips short of the take profit...or at least diminish its effectiveness by half.

Liquidity.....for every sell there must be a buyer...a prime broker that large funds used is usually big banks...for example deutsche bank, goldman etc...these big banks are actually a 'market maker'...go and do a research on this and i am sure you haven't understand the liquidity concept yet...darkstar has some good posts about if i have not mistaken. It is not good to share your winning system, especially if its the one that made millions..

P/s Even if i share my system 99% would still fail as the system needs discretion and a lot of discipline.

Here's a good example of what I mean. NZ employment figures were released about 15 minutes ago. NZDUSD has just fallen 70+ pips during that time (see screenshot). Unemployment was expected to be 6.7%, but instead was announced at 7.3%. If, instead, the figure had come out 0.6% the other way, the resulting effect on NZDUSD would doubtless have been very different.

How is it possible to predict these kind of event outcomes, and their effect on price, with 100% accuracy? Very simply, it isn't. Just as the holy grail (the chalice purportedly used by Jesus of Nazareth, that is supposed to give its finder magical powers) has never been found, neither will the holy grail of trading. Hence the 'mythical' metaphor.

Hey, off topic but I like the bid/ask quote lines you have on your chart, looks better than the default MT4 lines that stretch across the screen and print in the price axis of the chart.

That one of your indicators?

Because slippage would come into play and erode your edge due to the reasons stated above.

Although if you had a half decent "safe" automated system you could start a Signal Service and have the bot place the trade then send the signal only once the trade was filled...but I'm thinking that might land you in a small confined space with a big hairy cellmate for company...

P.S. ...and no, I don't believe there is a Holy Grail to be found (or that you need one).

Hey Jack, yes it is, guilty as charged.

It can be downloaded from the foot of this post.

I prefer short bid/ask lines, as I often confuse MT4's lines with my S/R plots.

David

[quote=Ishtana;6173222]Holy Grail in Forex has been found. No doubt.

hello, there is no such thing as a holy grailn same as el dorado but i know what your getting at.People have posted many good trading methods on FF but they still get berated by people. No trading method is fool proof and they will occassionally fliop, but it is all about keeping your head and sticking to the plan. Gain experiance and try and get a feel for the market just like the traders did from the start. Take care

First of all, I don't think that is possible to find the Holy Grail for trader. That really must be some sort of gypsy, studied Forex.

Secondly, using this Grail at specially for the whole market, will ruined Forex. Because a lot of people would predict the trend and the lows of the market will be changed.

Thanks y'all for the swift and intelligent responses. This turns out to be quite a fascinating read. I was really hoping to get experts' opinions on this.

I've taken all your points. Sharing will indeed kill the market inefficiency we all are trying to exploit. I guess the concept of capital accumulation is not applicable in financial market. Every major advancement in any industry in the world comes about because of the capital accumulation as Lord Keynes said, and this is only possible if people share and being rewarding for sharing their ideas and their ideas are protected. This is why countries who respect Intellectual Property are more advanced than those who do not. I think the financial market is more like poker. You shut your mouth when you got the best hand and take it all at the end. It's a dog eat dog world this is.

And I guess the reason why S&R, Fibs, and Wave do not always work is because there are not enough people using it. The price may bounce or may breakout depending who sees what, instead of a uniform bias. But that again as y'all have pointed out, if everyone agrees on the same S&R signals, I'm guessing the signals will be gone in anticipation and the price would not be volatile at all. It would be sideways throughout.

And this also makes sense in terms of those scammers who are selling forex systems. If it works, they know too well that they wouldn't sell it, or at least wouldn't sell it for just 3 digits. I'm a living testimony of this idea. But at the same time there are plenty of working systems. Some of you are the living testimony of this idea. The key lies in finding a needle in a haystack, or to create your own needle. I would humbly love to say that mine may possibly be included. It is not perfect in anyway, but at least it is better than a 50% chance. Very long and frustrating story short, I was stuck with a retail/scammer binary option broker which forced me to think outside the box and I did turn a lemon into a lemonade. I guess we all need that sense of urgency and burning our bridges to develop our potential.

And on a side note, avoid ALL binary options. The furthest you can go in terms of derivatives is forex options. I've tried to break through every little thing that I can think of to give me an edge with retail binary options, but the brokers always manipulate everything to their favor. Learn from my mistake, and never be involved with binary options unless you have a strictly proven strategy which can beat these gambling houses on their own terms. An average profitable forex trader will NOT survive long term with binary options. I even read somewhere from those who used to work with these binary options company. They were all sicken at the way these people scam their clients. Surely the blood is on their hands. And blood stain is hard to remove.

Anyway, re: the expert system, I think they would either avoid news release or get into the data feed and determine the majority of pending orders and react to them as soon as they are executed in nanoseconds. This system apparently can detect Market Environments (MEs) and only trade when the right condition presents itself. Just like Pac Man programs. Emotions are unpredictable but the numbers which represent them don't lie. A panic sell still turns out to be quite an orderly and detectable sell order received by the market maker.

I have the basic logic, although this may not be applicable in real life. Big movements in prices are caused by big players. There is no central clearing house, true. But there must be a way to collectively collect the movement of just these big players, from various main sources. Especially, as SuperTrader9 mentioned, that big players themselves are market makers. And a market maker has access to all orders.

And the fact that Forex is nothing but a game that big players manipulate, someone somewhere must be able to exploit this market's inefficiency and information asymmetry. And if you introduce the concept of collusion and game theory, big movements become predictable.

Well, to those who have found your own version of Holy Grail, a big congratulations. You're part of a very few elites. For the rest of us who are still clueless and putting irrational confidence in our system, we just have to keep searching.

I guess on psychological note, I would cry all day in forums and beg for a working system/EA just to have a consistent income. but once i have that working system, or created that working system/EA. why even bother think about other people when im doing well for my self. this might sound selfish but in reality thats how 90% of people think and do. and like what most traders said. it gonna be a disruption that might cause your holygrail to fail if too many traders use it.

Liquidity is limited. When many people using the same holy grail and then they trade at the same time there will not enough liquidity to absorb the trades. At the result some trades get liquidity and the other trades get big slippages or partial fills or requotes. The result will not same for each trader. Share our holy grail means we let other people to eat our liquidity.

On the other side of the argument....the liquidity issue really only becomes significant at lower risk/take-profit levels. Alternatively, this problem can be considered a "high volume" problem.

For example. If you are managing $12M and you are looking to take a position that risks 5% of that balance ($600,000) and your strategy which you've used to build that account to $12M calls for a 10-pip stop-loss/20-pip take-profit....then you need to use a position size of 6,000 lots!

Obviously, you'll probably want to split that up into a number of smaller orders...but even so, if all those smaller orders go in at the same time they're going to eat up the available liquidity pretty fast and move price....even if it's just a bit. With a 20-pip take profit, "just a bit" is often the difference between a winner and a loser.

Alternatively, if you have the same $12M account and want to risk the same 5% trade ($600,000) but your strategy uses a 60 pip stop-loss and a 120-pip take profit, then you only need to put on a position size of 1000 lots. Quite a big difference and a lot easier for the market to absorb. Also, with such wider stops, any amount you did "push" the market (even if the account was $120M instead of just $12M) would not be significant in how things would play out either in 60 pips of loss or 120 pips of profit.

Finally, you could work System #2 with 50:1 leverage. With the 10-pip stop-loss though, you'd need to move that up to 100:1 leverage.

All valid points guys. Thanks. But I'm not yet clear about the liquidity issue on the global scale. If forex market trade trillions a day, and most trades are done by the big guys, what damage can retail traders really do? How big are the retail traders on the forex daily pie anyway? My guesstimate is much less than 50%.

Liquidity problem only comes at the broker level, and not the global level. If a broker of 1000 clients suddenly have all their clients buying at the same time with the same order, then that's a massive problem. But if we deal with the interbanks, even 10,000 orders of buy/sell wouldn't sting a bit I would say. Because you would be matched against giant orders from governments, hedge funds, and big banks. Assuming, and this is a big assumption, that every of that 1000 clients are multimillionaire and each of them is putting 1M trade. The total of that would be 1B, which is still significantly less than the trillions dollar per day mark.

I think the perfect system can only be created outside retail forex, and the big guys don't have access to it. And that's what I've been reading on HFT and algo trading. I don't think the idea is too far-fetched. But never mind, this is just a side read. If you got something right going on, then keep doing it.

I've read info stating that retail traders amount to "approx 2%" and "less than 10%" of the total spot forex volume transacted. Somebody please correct me, if those figures are too far off the mark.

Liquidity varies enormously depending on the pair, and time of day. An order of 50 million can be enough to move the market, in certain situations. About 12 months ago, I had the privilege of a guided tour of the trading room at the Westpac Bank in Auckland. It was around 3pm (NZ time) and one of the traders was easing a client's 12 million NZDUSD order into the market, as 3-4 separate orders, to avoid its being too noticeable.

Again, from what I've read, the spot market is, to some extent, manipulated by the heavyweight players, creating recurring patterns and ranges from which savvy retail traders can potentially gain an 'edge'.

[EDIT] You might find the following links relevant:
FX Market: Dynamics, Participants and Transaction Methods
Kathy Lien on increasing transaction volume (shows pie chart breakdown of volume by pair, albeit as at Jan 2010)

Wasn't there a Big Swinging Dick on Wall Street that once shorted more NZD that was in circulation? That would be one hell of an edge.

Liquidity would definitely become and issue if you're taking on large positions with tight stops and small take profits. Remember, those "trillions and trillions" types of figures that people toss around in discussion are mostly due to speculators who are involved in the market on margin. So most of the money is "borrowed" through leverage which just ends up beefing up the figures. You can pack on a 2500 lot position size into a 20-pips stop loss and if the market goes against you, you loose $500,000. That might be just a 5% loss if you're bank account is $2M. But how much "volume" did you put into play? About $250M. But how much was really ever involved? The $500k that was lost. The rest was just fluff...but it contributed to that big daily figure. If you are a short term trader, you might put on seven such positions in a single day PER PAIR that you trade. So how much volume would one higher risk retail trader move through the market in a single day all by himself in this type of scenerio?

If he's trading E/U, A/U, G/U, and U/J and he puts on just 5 trades per day on each pair, that means he's moving 2500 lots x 5 trades x 4 pairs or 50,000 lots. That turns into about $5B units. But wait....that's just one SIDE of the trade, right? If he's a short-term trader who closes out positions each day then that figure will double to $10B. In one day. Just one guy.

Now here comes the issue with liquidity. When you pull the trigger on 2500 lots as a MARKET order...what happens? It chews up 2500 lots at WHATEVER price the computer can match you with, best price first. So if there's not a lot of standing orders at your price then you buy up everything at that price and start reaching for whatever's next in line. The result could be that when the whole thing gets filled, you end up sitting at a price that is NOT what it looked like on the screen when you pulled the trigger. With small stop losses and take profits, even ONE pip can make a difference between the trade turning into a loss, a profit, or triggering a break even. Then, when you go to get out, you have the issue all over again. Admittedly, things can go both ways. Perhaps everyone else bolsters your positions on each side so that slippage works in your favor both ways. Perhaps it works in your favor one way and not the other. Perhaps it works against you both ways. It's impossible to know...but there will be an impact when big order hit the wires in the form of market orders and not stop or limit orders that people can see and plan for.