Why NO system or method will ever be universally used.
Adam, this is an old post of mine but I have seen every single instance listed occur in real life.
I read somewhere recently that any particular strategy will be skewed if it becomes popular enough and enough people start using it.
That is indeed a widespread belief or concept. It is one of many that are often repeated by the financial media, another one is 'you can't time the market'.
I think it does not take into account the huge effect human nature plays in its application. I've been developing a computer program that governs my trading since late 2000 and in discussions with other developers and users since then I have experienced many scenarios of human nature that would prevent any system or method from becoming so widespread that it would invalidate itself. Below is a list of factors of human nature that would be involved.
1. The myth that any system or method can catch every point of every move every time. If any system or method had even one loss or drawdown, this would cause X percent of followers to drop off in search of a better one. If this happened on their first trade X would become a larger percent. If there were two losers in a row, I?ve seen enough posts over the years to know there would be a large exodus.
2. Along the same theme, if the system buys or sells and misses any possible further gain, another X percent would become discouraged.
3. Along the way, you will also get people who 2nd guess the system, and thereby miss trades and get discouraged. This also involves media coverage making them discouraged or too optimistic versus what the program is telling them.
4. The 2nd guessing can also take the form of pure disagreement with the system, for instance if it said to buy at a major market low when things looked especially gloomy or vice versa during euphoria periods.
5. How much work will it take also eliminates anther X percent of possible system users. To illustrate this, here?s an example. Early versions of my program took me 5 minutes per day to update. I had several people ask me if there was any way to automate that so they wouldn?t have to spend 5 minutes per day.
Think about it.
6. You would also loss another X percent of investors due to 'the grass is greener on the other side' syndrome, wherein they would drop off to chase a different system that looked better.
Your point exactly Adam
7. another X percent of people out there are religiously convinced it can't be done at all; to the extent they will steadfastly refuse to even look at trade receipts. Over the years I've seen about 75% of the people who respond just quote some sound bite they once heard saying 'you can't time the market' or must be curve-fit etc etc. When you press them for details, many times it turns out they have done little or no work on their own, just read an article once by a broker who said so. If I talk to 50 people, I get perhaps 5 that actually will do the diligence.
8. others feel that dollar cost averaging is the only way to go. (never having done the math)
9. Others are all hung up on management fees to the extent that they will ignore a 20% fund with 2% fees in favor of a 14% fund with 1% fees, because a sound bite told them fees are everything.
10. others will get all hung up with macro bear or bull projections and miss all the intermediate moves a system could produce for them, sometimes ending up on the wrong side of an entire run.
11. It takes money to make money, so if it takes $5,000 to trade a given system, how many potential users did you just eliminate?
12. How many people will make some excuse to withdraw their money because they want a new sofa? (or fill in the blank)
I've seen variants of this idea saying that if any one indicator was all that useful, everyone would follow it and it would become useless. In particular I've seen this said about the vix. Yet, it is as useful to my program today as it has been at any other time since the first back-tested trade in 1996.
In part, I think that is because it measures fear levels translated into option premiums and as such is a guage of the crowd. As a mass effect, the crowd is highly consistent, decade over decade.
I've been at this since late 2000 to correct my own gross inability to be a trader by using my career abilities as a programmer and fascination with contrarian indicators into a program which removed 'me' from the picture.
In short, unless it delivers 10% per month to their account in a bank with zero risk, I say no system or indicator will ever become that widespread
if I had time I would have looked, so thanks for the warning. Actually I can imagine Paul Tudor Jones might be using the site to test out his theory that he can publish a profitable system and people would still lose money.
It's comic-tragic that even if the whole website only had profitable systems, people would probably jump from system to system losing money on each one!
