All right, I've taken the decision to work on another 10 trading systems, all based on the same stuff: opening gap (different securities). Let me document how I start when I create a system (not always). I went to google and looked for:
opening gap system - Google Search
Then I picked what looked best to me:
Why the opening gap strategy makes an ideal automated trading system | MoneyHighStreet.com
The Opening Gap Strategy - Why it Makes a Good Automated Trading System
Automated trading Systems - Opening gap strategy equity curve | MoneyHighStreet.com
Probably these articles borrow from one another: so much the better. It means it's a good concept.
I've often wondered why people with a good strategy would write about it on the internet. I have no idea. I always thought that maybe they didn't make any money with it, but just enjoyed teaching people. This could be the case for some of them, but it cannot be the case for all of them. Some must be trading the things they are teaching.
I wouldn't teach all of the things I do - I would teach a few. But it could be the case that for other people it's different and they teach what they do. This in turn means that they are not afraid these things might stop working because they teach them. I don't know if they are right. In principle, if you know that going long at 5 pm is a good idea and tell everyone, more people will do it, this will drive prices up, and it will become less convenient do so. But probably they are counting on the fact that not enough people will follow them, and those who will follow them will be so grateful that they will outweigh the loss of profit.
If instead they miscalculated the effect of spreading their edge on the internet, and if everyone knew what's best to do, nothing would be best anymore, and the markets would be a flat line. I don't believe in the
Efficient-market hypothesis. I believe the markets - right now - are not efficient and you can make money consistently by outperforming them. However, this could change and if you keep on spreading tips on what to do to outperform the market, you will contribute to making them more efficient, and your edge will tend to disappear.
I went to wikipedia and found more on this subject:
http://en.wikipedia.org/wiki/Technical_analysis
Efficient market hypothesis
The efficient market hypothesis (EMH) contradicts the basic tenets of technical analysis by stating that past prices cannot be used to profitably predict future prices. Thus it holds that technical analysis cannot be effective. Economist Eugene Fama published the seminal paper on the EMH in the Journal of Finance in 1970, and said "In short, the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."[34] EMH advocates say that if prices quickly reflect all relevant information, no method (including technical analysis) can "beat the market." Developments which influence prices occur randomly and are unknowable in advance. The vast majority of academic papers find that technical trading rules, after consideration for trading costs, are not profitable.[citation needed]
Technicians say that EMH ignores the way markets work, in that many investors base their expectations on past earnings or track record, for example. Because future stock prices can be strongly influenced by investor expectations, technicians claim it only follows that past prices influence future prices.[35] They also point to research in the field of behavioral finance, specifically that people are not the rational participants EMH makes them out to be. Technicians have long said that irrational human behavior influences stock prices, and that this behavior leads to predictable outcomes.[36] Author David Aronson says that the theory of behavioral finance blends with the practice of technical analysis:
By considering the impact of emotions, cognitive errors, irrational preferences, and the dynamics of group behavior, behavioral finance offers succinct explanations of excess market volatility as well as the excess returns earned by stale information strategies.... cognitive errors may also explain the existence of market inefficiencies that spawn the systematic price movements that allow objective TA [technical analysis] methods to work.[35]
EMH advocates reply that while individual market participants do not always act rationally (or have complete information), their aggregate decisions balance each other, resulting in a rational outcome (optimists who buy stock and bid the price higher are countered by pessimists who sell their stock, which keeps the price in equilibrium).[37] Likewise, complete information is reflected in the price because all market participants bring their own individual, but incomplete, knowledge together in the market.[37]
[edit] Random walk hypothesis
The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his book A Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future."[38] In a 1999 response to Malkiel, Andrew Lo and Craig McKinlay collected empirical papers that questioned the hypothesis' applicability[39] that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH.
Technicians say the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.[20][40] Critics reply that one can find virtually any chart pattern after the fact, but that this does not prove that such patterns are predictable. Technicians maintain that both theories would also invalidate numerous other trading strategies such as index arbitrage, statistical arbitrage and many other trading systems.[35]
Overall, I would say that the professors are wrong, and the traders are right, and especially that maybe not me, but there are traders living (consistently) from trading, so this alone proves that you can outperform the markets. The explanation as to why professors are
so wrong, could be this: the professors teach, the traders trade. If a professor found out that he can make money trading and outperform the markets, then he would trade, and would cease to be a professor or he wouldn't even make it to become a professor. So as a consequence you cannot have professors who say that you can make money with trading.
Another explanation could be that all those who make money by outperforming the markets are interested in hiding their edge, so they'd all be happy if others thought that you cannot develop an edge. So, on one side, you have those who cannot trade and who say "you just can't make money trading" (also to make themselves feel better about not trading profitably themselves), and on the other side, you have others who know this is not true, but are ok if everyone else stays ignorant and therefore will not go out of their way to tell everyone they're wrong, also because they might be asked to demonstrate that, and that would expose their edge. If you tell people you make money in the markets via automated trading, you're telling them a lot. You're telling them it's possible and you're telling them in what direction to do. Maybe that's why, when I lose, I am happy to write it. First of all because I enjoy telling the truth, and second of all because, even by telling the truth, I might discourage people from following me in doing automated trading, which will help preserve some of my edge. I think that if I'll ever get beyond a capital of 100k, I will just stop writing the journal, because I'd feel I have something very precious, and I'd be afraid of having it stolen. On the other hand, right now, I don't feel like I have much, simply by looking at my very small bank account, and at my 12 years of losses. That's also why the best time to ask me about my strategies is right after they cost me a big loss, and the worst time is right after they gave me a big profit.
There's plenty of people like me who enjoy speaking the truth, who are talkative, and who are going to write pages and pages about themselves and how successful they are, showing off, bragging, boasting and so on. So some information will get away and that is partly why, on the internet, there's so much information on how to develop a trading edge. Also, you won't hear all the profitable traders keeping quiet, so it will seem that just about everyone is talking about how they make money: deceptive appearance that will lead you to think that they are just out to sell you something, whereas they're just out to show off like me (looking for someone who'll tell them "wow, you're a genius"). Hopefully the articles I will read on "opening gap" are written by people who know what they are talking about, and not by people who just enjoy teaching, even though they don't know if those things work. The very good thing is that with tradestation, it will take me just a few hours to find out whether the "opening gap" works or not.
