Why Consistency is a Sign of The Wrong Strategy

[Tamsin]

I always see lots of discussion on this forum about consistency - whether it be consistent systems, trading methodologies, etc
the simple facts [ not an opinion] are that if you look at the most successful traders and investment managers in history [ i.e. a track record of at least 20 years compounding somewhere around 20% per anum - incidentally only 4 exist above 20%] then the one feature they all have in common is consistency is not achievable for long term success. In fact one could argue the more consistent a strategy is over the short term the less likely it is to work in the long term. The simple reason is that its likely to be optimised and curve fit.
Robustness is far more important than consistent and the 2 are not related

 

[Trader333]

Maybe you can explain what makes something robust as opposed to consistent and the constituent parts of each.

 

[Tamsin]

Maybe you can explain what makes something robust as opposed to consistent and the constituent parts of each.

Robustness is defined as something that will survive when you make underlying errors in its design i.e. even with changed parameters it still works. Also if you make errors in your judgement about the underlying data used in that system - the system still works
so for example over 30 years a robust system maybe a simple break out system of 200 days - it doesn't really matter if its 100 or 300 it still works. Similarly if markets don't trend for a period of time it doesn't blow up either.

A highly consistent system maybe for example all the systems we saw between 2004-2008 that sold volatility - day after day you could print money and erroneously assume the holy grail had been found - this was a consistent way to make money for years - then one day - they all blew up as the underlying market circumstances changed - perhaps anyone who believes in consistency should also have a look at the story of long term capital management ?
so comparing that to a relevant example today - the whole world believes stocks could not possibly collapse as the central banks of the world will always support them / print money - a great consistent system that has worked well for 5 years - but a system almost certain to blow up at some point in the not too distant future ?
What makes trading so hard is that the vast majority [ 99%+} are lured into trading by the promise of consistent profits through unproven nonsensical stuff like technical analysis [ most indicators] or even worse fundamental analysis - people often then suffer from recency bias [ the highly prominent human condition of thinking that just because something has been "the way it is" for your lifetime / the last few years - that's the way it will always be] a very dangerous condition

The best evidence really is the lack of audited success stories of consistent profits - they simply do not exist in the long run - we all know a mate / trader who for 2 whole years has made x% - but does anyone ever meet one who has done it for 20 years ? Probably the most consistent long term proft maker was Monroe Trout - so one then has to ask what was his edge ?

 

[Trader333]

Well I agree that a trend trading approach will work when markets are trending and that a volatility expansion strategy will work when markets are volatile. However, what happens to a trend trading strategy when markets stay volatile for a very long time ? They lose money and a lot of it. I think the problem is that there is no "one size fits all" approach and the key is knowing what phase a market is in and I doubt most long term funds have the ability to switch as they tend to stick with one approach.

What would you suggest as a way forward ?

 

[Tamsin]

Well I agree that a trend trading approach will work when markets are trending and that a volatility expansion strategy will work when markets are volatile. However, what happens to a trend trading strategy when markets stay volatile for a very long time ? They lose money and a lot of it. I think the problem is that there is no "one size fits all" approach and the key is knowing what phase a market is in and I doubt most long term funds have the ability to switch as they tend to stick with one approach.

What would you suggest as a way forward ?

In my humble opinion there is only one way forward and that is to stick the approaches that have an edge
one of them is trend following - very few can do it because they cannot sit through lengthy draw downs - but it is still just about the most successful strategy in history - otherwise develop another hedge based on rigorous back testing based over many years and many market phases - there are only really 3 market truths - price/ volume and time - the rest as they say is .............. !!!

 

[Dinos]

stick the approaches that have an edge
one of them is trend following -

Then basically be consistent and follow a trend

 

[Tamsin]

Then basically be consistent and follow a trend

Yep - agreed - be consistent in your approach and if your approach is right you will never have consistent profitability i.e. 70% winning trades - 11 winning months per year, etc - any strategy with any hope of lasting will usually have a 50% draw down at some point, be right 30% of the time and may well see 2 year periods of draw down.
if that were not the case then a fund with a 20 year track record would exist that did not display these characteristics - and one doesn't

 

[postman]

The problem with self-professed experts is they spout so much b*llox...

http://www.ft.com/cms/s/0/0e8880a4-cc65-11e3-9b5f-00144feabdc0.html#axzz32N5u5beE

Edit: Added snapshot of FT headline for those w/o a subscription...

Thanks for bringing it back to Earth , it started out like a Socratic dialogue.

 

[2be]

Robustness is defined as something that will survive when you make underlying errors in its design i.e. even with changed parameters it still works. Also if you make errors in your judgement about the underlying data used in that system - the system still works
so for example over 30 years a robust system maybe a simple break out system of 200 days - it doesn't really matter if its 100 or 300 it still works. Similarly if markets don't trend for a period of time it doesn't blow up either.

A highly consistent system maybe for example all the systems we saw between 2004-2008 that sold volatility - day after day you could print money and erroneously assume the holy grail had been found - this was a consistent way to make money for years - then one day - they all blew up as the underlying market circumstances changed - perhaps anyone who believes in consistency should also have a look at the story of long term capital management ?
so comparing that to a relevant example today - the whole world believes stocks could not possibly collapse as the central banks of the world will always support them / print money - a great consistent system that has worked well for 5 years - but a system almost certain to blow up at some point in the not too distant future ?
What makes trading so hard is that the vast majority [ 99%+} are lured into trading by the promise of consistent profits through unproven nonsensical stuff like technical analysis [ most indicators] or even worse fundamental analysis - people often then suffer from recency bias [ the highly prominent human condition of thinking that just because something has been "the way it is" for your lifetime / the last few years - that's the way it will always be] a very dangerous condition

The best evidence really is the lack of audited success stories of consistent profits - they simply do not exist in the long run - we all know a mate / trader who for 2 whole years has made x% - but does anyone ever meet one who has done it for 20 years ? Probably the most consistent long term proft maker was Monroe Trout - so one then has to ask what was his edge ?

It looks that there is a semantic problem.
https://www.google.co.uk/search?q=s...sourceid=chrome&es_sm=93&ie=UTF-8#q=semantics
IF one replaces the word "consistency" with another "c" word - constipation there should not be any meaningful loss of logical content to the subject matter of the proposed thesis of this thread.
It is very intriguing to work out what you are trying to say and to prove or propose. After trying to work it out the only other "c" (a very polite ) word that comes to mind is CONFUSION. (There are other less polite words too, but we are all nice here.)
Best wishes for the next thread,
2be

 

[timsk]

. . . Sometimes I wonder if I'm a little acerbic in my tone . . .

Errr, I think that's an understatement DJ! And it's a great pity, as it deflects from your points which are usually interesting and very well made - as in your criticism of the OP's argument in this thread.

Whether or not one agrees or disagrees with the OP - and regardless of their motivation / possible agenda for saying what they say - they are perfectly entitled to post anything they want, so long as they don't breach the Community Constitution. There's very rarely any justification for an acerbic response, certainly not in this case. I think the OP is to be congratulated for daring to question one of the basic tenets that most traders hold dear - the notion of being consistently profitable. By all means question the argument being expounded and counter it with an argument of your own. That's what T2W exists for. But please do it politely! T2W is a discussion forum, not an argument forum where everyone dismisses a post they don't like as 'crap' or 'inane drivel'. Nine times out of ten, rudeness dilutes the potency of the point being made - rather than enhances it.
Tim.

 

[Forexmospherian]

Hi Tim, yeah I hear you... my point (often badly made to be sure) is that there is a large segment of the retail trading industry that frankly is dishonest and harmful to aspiring traders. There is also a v large amount of incorrect information that again harms aspiring traders. And that is what gets my back up.
That being said, it's not my forum, and you're being v polite in your request, so I will tone it down.
Cheers, DJ.

Hi DJ

interesting you say that and I agree with you - although I look upon it that the commercial trading industry have more to gain by promoting all the dishonesty and incorrect info that is awash in the retail side

In FX - retail makes up approx 10 % ( thats if I can believe the figures as everything unregulated) and so that's more than many individual large banks outside the top 3 or 4.

Surely - its in the interest of the commercial finance to have a "mixed up" - confused - mis- informed retail sector - so that they can be taken advantage of.

Well it would be if i was a big player

Keep up the good work DJ -

Regards


F

 

[tar]

Hi DJ

interesting you say that and I agree with you - although I look upon it that the commercial trading industry have more to gain by promoting all the dishonesty and incorrect info that is awash in the retail side

In FX - retail makes up approx 10 % ( thats if I can believe the figures as everything unregulated) and so that's more than many individual large banks outside the top 3 or 4.

Surely - its in the interest of the commercial finance to have a "mixed up" - confused - mis- informed retail sector - so that they can be taken advantage of.

Well it would be if i was a big player

Keep up the good work DJ -

Regards


F

From where you get that 10% ? I read it is around 2-3% ...

 

[Forexmospherian]

From reports via FX Magnates on world wide FX surveys in 2012 -13

Need to see if I can find them out - also info from Zero Hedge reports on the growth of FX retail

I will try and source again a bit later

Cheers

 

[tar]

Made my post b4 i read DJ's , which confirms my number it is around 3% and it is irrelevant in the FX market . Forexmospherian just keeps posting misinformation about Forex .

 

[timsk]

Hi Tim, yeah I hear you... my point (often badly made to be sure) is that there is a large segment of the retail trading industry that frankly is dishonest and harmful to aspiring traders. There is also a v large amount of incorrect information that again harms aspiring traders. And that is what gets my back up.
That being said, it's not my forum, and you're being v polite in your request, so I will tone it down.
Cheers, DJ.

Hi DJ,
I doubt there is anyone who's been in this game for more than five minutes who will disagree with you. Make no mistake, T2W welcomes and encourages the efforts of experienced and knowledgeable members to highlight the flaws (as they perceive them) in the posts of those who may not have the best interests of the forum and its members at heart. The problem is that dishonesty and incorrect information is often (usually?) subjective. Take FoMo: he agrees with you on this point, only to have tar accuse him of repeatedly posting "misinformation about Forex"! Ultimately, members have to make up their own minds about what is correct or incorrect and misinformation that's designed to mislead rather than to enlighten. Their task will be much easier if they can read well written posts that are free of insults and rudeness that usually result in flame wars.

Thanks for agreeing to moderate your language.

Tim.

 

[tar]

Hi DJ,
I doubt there is anyone who's been in this game for more than five minutes who will disagree with you. Make no mistake, T2W welcomes and encourages the efforts of experienced and knowledgeable members to highlight the flaws (as they perceive them) in the posts of those who may not have the best interests of the forum and its members at heart. The problem is that dishonesty and incorrect information is often (usually?) subjective. Take FoMo: he agrees with you on this point, only to have tar accuse him of repeatedly posting "misinformation about Forex"! Ultimately, members have to make up their own minds about what is correct or incorrect and misinformation that's designed to mislead rather than to enlighten. Their task will be much easier if they can read well written posts that are free of insults and rudeness that usually result in flame wars.

Thanks for agreeing to moderate your language.

Tim.

Misinformation about this whole commercial vs Retail FX thing ...

 

[Forexmospherian]

Misinformation about this whole commercial vs Retail FX thing ...

Hi Tar

i like you Tar would love to know more - "true" info on the FX market

Here's one on Retail - but will find another 3 or 4 about how retail through brokers - both regulated and un regulated as grown over last 5 yrs.

http://online.wsj.com/news/articles/SB10001424052702304818404577345842145816520

Need to find the other reports and hope to have them in the next 30 mins


Misinformation will always be around in unregulated markets like the Currency markets and so to get the truth will always be difficult.

But having worked in 2 large international conglomerates - ( at divisional Board level - and also represented one at a Monopolies commission hearing ) i am well aware of the tricks of the trade - and feel the FX market is one that as so many dark secrets - yet to be fully explained

Please don't think I even believe the reports I will find and post - I an sceptical of the whole Industry and so take everything - with a pinch of salt

With regards to the two sides of the fence - ie Commercials / Institutions v Retail - yes I for one look upon them very differently

Retail needs commercial - commercial FX does not need retail - or does it ????

 

[Forexmospherian]

Quote - from Forex Magnates 2012/13 Forex independent Industry Report -

Confusion reigns over true size of retail market

However, there is some disagreement over these figures, owing mainly to the fact that the BIS survey used ‘single counting’ for its calculations – which means that just one leg of the transaction is registered. With both legs taken into account, the volume of retail FX spot transactions is doubled to $156 billion per day. This brings it more into line with the figures quoted in Forex Magnates’ Quarterly Forex Industry Report, published in July 2013, which estimated the retail market as being worth $325 billion per day. At the time of the survey, it was assumed that this represented 8.1% of the $4 trillion per day forex market, but in light of the new figures, it would represent a more modest, but still substantial, 6.1% of the market.

Looking now for the report saying approx 10% of the market - ie not 8.1 % or 6 .1 %

 

[Forexmospherian]

More Quotes from FX independent reports -


The balance of power shifts

What this shift shows is that technology that was originally designed for use by fund managers, such as computer trading systems and high-speed network connections, is becoming more widely available to independent investors, democratizing and lending transparency to the FX market.

Peter D'Amario, Greenwich Associates


“The juggernaut that is retail FX is picking up steam,” said Peter D’Amario, a consultant who worked on the survey, adding that he expects retail aggregators to maintain this market share.

Retail aggregators, including companies such as Saxo Bank, OANDA, FXCM, and Gain Capital, select the best exchange rates currently available from the major banks and make them available to their clients, with a small margin added on in the form of the spread. This results in prices that are quite close to the wholesale interbank rates. As well as serving independent investors, these aggregators also serve small companies and even some funds.

The fall-off in the market share of banks is largely a product of new methods for exchanging money internally, rather than trading on the open market. This leads to greater efficiencies, minimising exposure to volatility. These banks have also been indirectly benefiting from the growth in the retail market by providing retail aggregators with rates.
Quotes again -


A more recent release by Greenwich Associates, which despite lacking the depth of the 2012 survey, contains some interesting data, indicates that this trend continued into 2013:

“As a source of trading business, retail aggregators rank second only to banks, which generate about 26 per cent of global volume,” says Greenwich’s latest release.

 

[tar]

I don't think bets made OTC with retail fx brokers are really should be included in the FX volume , for example : should we include the volume of spreadbetting bets made on Dax in the total Fdax futures volume ? I don't think so ....
At the end these are just bets - most are not hedged - and it has nothing to do with the marketplace ...