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Trading is a Paradox

  • #1
  • First Post: Feb 26, 2015 2:13pm Feb 26, 2015 2:13pm
Here is the funny thing about risk...

Whenever someone discovers something about the market that is not efficient and the information about it becomes public, the behavior is then priced out of the market as enough participants take advantage of it. If you have a strategy that works, take it secret to your grave if you want it to continue to exist.

The mechanism of how things get priced out is really simple...

Say someone discovers a momentum strategy in the past... Where if the market is rising at a certain speed measured by like (Percent or ATR per 5 Minutes) where it generally continues onward for at least X amount of time before stopping. How would such a working strategy stop working because of a majority of participants becoming aware of it?

Well, instead of the market continuing up for the amount of time, participants who know the signal suddenly pile into the market on it causing the market to get extremely overbought and snap back against their positions.

Support levels can have the same problem... If too many people think a specific support level is rock solid... The long positions they establish on that level become a tail risk, if prices go below their levels they can all blow out simultaneously slamming the market lower.


Whenever your read something about some strategy where it comes to buying a strong currency and shorting the weaker currency, etc... Realize that if the majority of active traders know about it, it's probably priced out. You cannot generate alpha without knowing something that the majority of participants do not.

There is no Holy Grail formula because the knowledge of the existence of the Holy Grail would cause it's existence to disappear. The only working strategies that exist are theories and strategies developed by individuals/small funds which take advantage of the majority of market participants behavior. You must know something others do not about their behavior.
"Don't fear a bubble until it starts to burst."
  • #2
  • Feb 26, 2015 3:09pm Feb 26, 2015 3:09pm
Even if I agree partially to you there are a few things you should keep in mind:

There are participants at the market who do not speculate and try to make profits out of their trades. Organisations who hedge their real world currency risk as well as political bodies who want manipulate the currency rates to fit their personal needs.

The market is enormous, there will always be information asymmetry, no matter what we retail traders talk about here at the forum it will not move the market significantly as well as big guys will not always be able to copy strategies being used by people with way smaller accounts. Not every strategy if publicly will cease to exist.

Combined with transaction costs existing and market access not being equal for everyone forex will never be efficient or brokers would not be able to make any money.
  • #3
  • Feb 26, 2015 5:57pm Feb 26, 2015 5:57pm
Quoting meanvel
Here is the funny thing about risk... Whenever someone discovers something about the market that is not efficient and the information about it becomes public, the behavior is then priced out of the market as enough participants take advantage of it. If you have a strategy that works, take it secret to your grave if you want it to continue to exist. The mechanism of how things get priced out is really simple... Say someone discovers a momentum strategy in the past... Where if the market is rising at a certain speed measured by like (Percent or ATR...
so you want us to keep our knowledge and don't educate people
world is not moving that way thanks god and there are few of your kind
if that was true all knowledge we have now including technical analysis GANN and other systems was not going to exist
i think you are a small child
help people let keep it moving methods and strategies develop by spreading nothing will benefit you in grave but a good heart
i usually dont replay to your kind of talk but grow up and see the world the right way peole are for people even if you are a king if you dont respect and care for your guards they will kill you one day think move thah thing in your head
all have a nice day
focus while relaxed to see better
  • #4
  • Feb 26, 2015 6:38pm Feb 26, 2015 6:38pm
Quoting orabi
{quote}so you want us to keep our knowledge and don't educate people world is not moving that way thanks god and there are few of your kind if that was true all knowledge we have now including technical analysis GANN and other systems was not going to exist i think you are a small child help people let keep it moving methods and strategies develop by spreading nothing will benefit you in grave but a good heart i usually dont replay to your kind of talk but grow up and see the world the right way peole are for people even if you are a king if you...
No doubt, some of Meanvel's thoughts are debatable, but your tone could have been little softer.

Meanvel - I do not believe in many (almost all) trading myths, but it is proven fact that they do work many times. In fact, my most successful method is based on taking chance of a bounce on key support/resistance levels and it works more than 50% of the time. Yes, there are several occasions when it badly fails, but still works more than 50% of the time. You can check it on Daily, 4H and 1H charts for yourself. If you want to check now, check what pa does at eur/usd 1.1209 level in the next 24 hours.

What you mentioned about a method losing its effectiveness if many people start using is correct to some extent. In trading terms it is called Traders' Effect. There are so many tools in use that every pip becomes a level if one is using all of them, but they still maintain their utility.
The Thief of Wall Street
  • #5
  • Feb 26, 2015 8:09pm Feb 26, 2015 8:09pm
I don't agree that the majority traders are the main movers of the markets. Retail traders account for a small potion in terms of volume. Only in terms of numbers they are the majority.

How price move is largely determined by institutional traders that contribute the most to volume. They manipulate market price and set the rules of the market for their own benefit.
Riding the order flow
  • #6
  • Feb 26, 2015 11:08pm Feb 26, 2015 11:08pm
Quoting Chicky
{quote} No doubt, some of Meanvel's thoughts are debatable, but your tone could have been little softer. Meanvel - I do not believe in many (almost all) trading myths, but it is proven fact that they do work many times. In fact, my most successful method is based on taking chance of a bounce on key support/resistance levels and it works more than 50% of the time. Yes, there are several occasions when it badly fails, but still works more than 50% of the time. You can check it on Daily, 4H and 1H charts for yourself. If you want to check now, check...
His though are so evil and i think it bad to spread such attitude between people if a method works it will still work in another way that why we develop all the time our systems .i have until now about one system cog system with timer ,chair pattern and seven other ways of analysis i gave all for free because i just want to be something like those who helped us Elliot and gann and a lot then he comes and say we should just keep any knowledge for our graves hahahaha you want to keep it for your grave spread it and develop people around you you will have a great funeral and the best grave out there
sorry chicky but those kind of people keep us heading backword thats way i feelt so angry i will watch my words next time and wish you the best
all have a nice day
focus while relaxed to see better
  • #7
  • Feb 26, 2015 11:09pm Feb 26, 2015 11:09pm
Quoting Kilian19
Even if I agree partially to you there are a few things you should keep in mind: There are participants at the market who do not speculate and try to make profits out of their trades.

Organisations who hedge their real world currency risk as well as political bodies who want manipulate the currency rates to fit their personal needs. The market is enormous, there will always be information asymmetry, no matter what we retail traders talk about here at the forum it will not move the market significantly as well as big guys will not always be able...
The people who do not speculate don't really have an effect upon price action. It creates a small probably undetectable trend or mean-return bias.

This is very true. The more money you trade the harder it is to make money. This is why a lot of quant funds only have success trading smaller amounts of money. A lot of quant strategies simply won't work with larger amounts because it effects the market too much.
"Don't fear a bubble until it starts to burst."
  • #8
  • Feb 26, 2015 11:12pm Feb 26, 2015 11:12pm
What I say is 100% valid in pure-speculative markets like Bitcoin... Where the entire market is purely speculators trying to game each other. Transaction use of bitcoin just causes slight noise and a very negligible slight trend bias over the very long term.

The FX market is definitely engineered a bit by central banks.
"Don't fear a bubble until it starts to burst."
  • #9
  • Feb 27, 2015 8:52am Feb 27, 2015 8:52am
Quoting meanvel
... The mechanism of how things get priced out is really simple... Say someone discovers a momentum strategy in the past... Where if the market is rising at a certain speed measured by like (Percent or ATR per 5 Minutes) where it generally continues onward for at least X amount of time before stopping. How would such a working strategy stop working because of a majority of participants becoming aware of it? Well, instead of the market continuing up for the amount of time, participants who know the signal suddenly pile into the market on it causing...
I know it probably seems this way, in fact, I saw it this way for several years. But it is not the "truth" about the market. In the above observation it is more likely that the "inefficiency" found was coincidence and not truly an established pattern. This has happened to me more times than I can count.

The "truth" (if you want to call it that) is this:

  1. People participate in the markets based on their beliefs
  2. Their participation results in either (a) a net imbalance - more participation on one side or the other; or (b) a net balance - roughly equal participation on both sides.
  3. This order flow balance or imbalance leaves tell tale "foot prints" behind in price that many refer to as a "pattern"
  4. The "pattern" is mostly random and thus exploitation of these patterns also produce random results.
  5. Learning to see the CAUSE of the price action (ie the net balance or imbalance of order flow) is where "reading" price actually comes into play and results in consistent profitability.
  6. Of the market only two things can be said to repeat everyday (a) price will rise and (b) price will fall - not necessarily in that order. To use that to your advantage you must understand WHY price rises and/or falls then find a way to "see" that in your charts.

I would seriously doubt that larger banks and institutions (who are largely responsible for the market order flow) consider too much about the latest "system" some retail trader thought up and posted on FF. I think it far more likely that the "pattern" or "inefficiency" found was a quirk, a coincidence that randomly appeared and will just as randomly disappear.

  • #10
  • Feb 27, 2015 12:29pm Feb 27, 2015 12:29pm
Really? I thought that we are all going to get rich..

Good news - there will always be inefficiencies in the market.

Quoting Chicky
{quote} In fact, my most successful method is based on taking chance of a bounce on key support/resistance levels and it works more than 50% of the time. Yes, there are several occasions when it badly fails, but still works more than 50% of the time. You can check it
Does it make any money , or it just works more than half of the time ...

What does "work more than 50% of the time mean" ? i can say any level and there is a great chance that there will be some support or rerssistance there, some reaction. How does that help me ? It does not.
  • #11
  • Feb 27, 2015 8:13pm Feb 27, 2015 8:13pm
Quoting feline207
Really? I thought that we are all going to get rich.. Good news - there will always be inefficiencies in the market. {quote} Does it make any money , or it just works more than half of the time ... What does "work more than 50% of the time mean" ? i can say any level and there is a great chance that there will be some support or rerssistance there, some reaction. How does that help me ? It does not.
This is a trading method and not an employment where one works more than 50% of the time but money goes to the owner.
Please do say a level.
I don't know how it will help you, but check this it may help.
The Thief of Wall Street
  • #12
  • Feb 28, 2015 3:07am Feb 28, 2015 3:07am
Quoting Chicky
{quote} This is a trading method and not an employment where one works more than 50% of the time but money goes to the owner. Please do say a level. I don't know how it will help you, but check this it may help.
Flip a coin and enter with 10 pip takeprofit and no stop, it can work 100% of the time. In fact choose any tp you want.
  • #13
  • Feb 28, 2015 6:01pm Feb 28, 2015 6:01pm
Quoting feline207
{quote} Flip a coin and enter with 10 pip takeprofit and no stop, it can work 100% of the time. In fact choose any tp you want.
LoL... Someone got a little too used to the market conditions of 2009-2014...

How about a 10,000 pip take profit on a EUR long... Probably wouldn't see that one pay out within a couple human lifetimes. Actually, the EUR probably won't even exist for one human lifetime...

You need to look up "Gamblers Fallacies."
"Don't fear a bubble until it starts to burst."
  • #14
  • Feb 28, 2015 6:08pm Feb 28, 2015 6:08pm
Quoting feline207
{quote} Flip a coin and enter with 10 pip takeprofit and no stop, it can work 100% of the time. In fact choose any tp you want.
You can't completely discount what this guy said even though his logic is flawed... Because the EUR/USD is maintaining a 100 pip daily range, and only trending downward at around ten pips a day on average... In the bigger picture, it's losing fifty pips a week with a average weekly range of three hundred pips.

If conditions shift more toward a 300 pip weekly range with <20 pips weekly average trend velocity, his strategy would actually work 100% of the time if entered at average prices... Pre-EU open or late US session when volatility is contracted. But, the strategy would blow up as soon as the market shifts back to a new trend.

The main problem is the drawdowns would probably go as far as 300 pips before price shifts back to the other side of the range to hit the 10 pip take profit a quarter of the time or so. The market usually trades in a range that is around 2x ATR...
"Don't fear a bubble until it starts to burst."
  • #15
  • Feb 28, 2015 6:46pm Feb 28, 2015 6:46pm
Actually... His strategy is more flawed than I thought.

There is actually only one recent period where it would have worked... From the 1-29 to a few days ago... Probability of below/above average prices being tested was balanced.

When you have say 100 pip range and that range is trending down thirty pips a day on average... You have to be ridiculously skilled to manage to pull off any successful long side trades. A random coin flip will simply not cut it.

Attached Image (click to enlarge)
Click to Enlarge Name: probabilityZone.png Size: 32 KB
"Don't fear a bubble until it starts to burst."
  • #16
  • Last Post: Edited 7:14pm Feb 28, 2015 6:58pm | Edited 7:14pm
Hmmm... Another problem... The market was only maintaining about a 40% probability of touching half a range above/below mean during that period...

A 40% Probability 4xOR Compound = 87.04%

So, holding a trade for four days... There was only a 87% probability of price touching half a range above or below mean... His coin flip strategy just would simply not work unless you were shorting ten pips above mean, and long ten pips below mean...

Now, with that 80% mean return probability...
A 80% Probability 3xOR Compound = 99.2%... So, over three days of holding, you would have a 99.2% probability of price crossing back through mean... So much for a 100% probability trade! Which ever way you slice it the highest probability you can find is 99%, and that requires a 3 day+ holding time required to get a high enough compound probability of mean return... And, if that mean starts to move, your screwed.

Anyway... Just rather interesting to analyze some of these gamblers fallacies. It would be a very bad idea right now... Market is ramping back toward a 90%+ probability of testing under average prices each day with a declining average price...

Odds get so slanted during trends... That recent trend was essentially a couple months with a 99% probability of prices touching a quarter range or more below the 6SMA each day, and the 6SMA dropping by around thirty pips a day... LoL! Long side traders just didn't stand a chance with such a probability slant.
"Don't fear a bubble until it starts to burst."
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