Yesterday I wrote Conspiracies, Regulations, and Trader Paranoia in which I tried to clear up some of the common perceptions that I’ve seen of late. A comment was left on that post which I think warrants more than just a reply in the comment stream.
Can an edge be shared and still be profitable given that trading is a zero-sum game?
I’ve expressed my views the zero sum question in the The Zero Sum Game post some time back, so I won’t delve into that here. Instead I’ll speak to the main part of the question.
There are well known profitable systems out there
William O’Neil, the founder of Investors Business Daily, published his own set of stock trading rules in How to Make Money in Stocks. That book in its numerous editions is one of the best selling trading books of all time (check out Thoughts on CANSLIM). I can personally attest to the value of that system for stock trading, as can countless others. That hasn’t changed the efficacy of the system to those using it.
Richard Dennis, an original Market Wizard and the creator of the Turtles, once said something to the effect that he could publish his trading rules in the paper and most folks would never make money with them (If you are unfamiliar with the Turtles check out The Complete Turtle Trader and Way of the Turtle). I think his main point, if I remember correctly, was that most people learning the system wouldn’t end up trading it as intended.
Of course these are just some of the high profile systems. There are loads of lesser known ones which are being used quite profitably and being shared around on forum sites all the time.
Efficient Markets and System Degradation
The argument people make, especially academics, against the sustainability of a popular trading system comes mainly from an efficient market perspective. Even academics will now admit that markets aren’t as efficient as they’d thought. One need only look at the volatility of the last couple years to get a good indication of how inefficient they can get. The lack of efficiency means people don’t always do the smart, rational thing – like sticking to good trading strategies.
The financial markets are massive. How massive can sometimes be hard to see from the perspective of an individual who only really sees what he/she is doing and prices moving around on a screen. There are millions of market participants, all with their own biases and ideas and ways of trading. They operate in different time frames and use different instruments to play the markets (ETFs, futures, options, etc.). That means any one trading system is just one of a vast multitude being employed. As such, it isn’t going to have an impact on things.
Trading Systems Used By Individuals Aren’t the Problem
The only way a system comes to influences its own performance is if that system represents a dominating fraction of the market’s volume and participation. That’s where some of the quant systems, carry trade strategies, and other complex approaches that blew up in recent years got into trouble. They were big players all playing the same way in the same markets, some of which weren’t overly liquid. That created market inter-relationships which were unanticipated so when they all tried to get out it blew apart on them.
Now, unless you are a hedge fund running billions of dollars, you’re not going to have any real issues sharing your trading strategies with other players. It would take a huge number of individual traders all trading the same market the same way at the same time to create problems. The chances of that many folks representing that large a volume portion, all sticking to one trading system, and operating in the same time frame in one stock, forex pair, or commodity are so slim as to effectively be nil.
Bottom line: Don’t worry about sharing your trading strategies unless you trade size in a low liquidity market.