4 ms·

Good trading strategies always stop working (after fees) when they get commodified.

mamon 8y ago
Really? I always thought the opposite is true: trading strategies work BECAUSE they get commodified. I mean, it's like self-fulfilling prophecy: if enough mutual funds managers look at the price chart, draw the same magic lines, apply the same magic formulas, then they reach the same conclusion "buy this stock". And then they start throwing their billions USD of assets at it, and the stock price actually starts climbing up.
- adrianN 8y ago
  But people who have better insight into the real performance of those companies can make more money if more people just apply magic formulas.
  - askmike 8y ago
    The most successful fund for the last decade(s) fits more one the magic formulas side (the Medallion Fund from Renaissance Technologies). EDIT: Oops, I misread your comment.
- simonh 8y ago
  I think both can be true, depending on the details of the strategy and the conditions in which it’s valid. Sometimes common knowledge of a strategy can lead to the elimination of the situation in which it works. Participants can anticipate it and so the conditions no longer occur. In other cases so many participants pike into the strategy, in which there is only so much money to be made, that returns get so thin that only the very most efficient and smart participants can get anything out if it. Arbitrage is a good example, once its known it can get traded out of the market very rapidly.
  - allahreturns 8y ago
    This is precisely what's happening with dropshpping. Now soon many people are interested in that, making money is lately just too difficult and most are making money selling courses to gullible people.
- quantummkv 8y ago
  The stock market is basically a transfer of wealth from one person to another. For a good strategy to work, someone has to make a bad strategy. If everyone gets a good commodity strategy and applies it you will end up in a stalemate. Maybe not instantly but somewhere down the line.
Nasrudith 8y ago
Especially if they are effectively arbitrage - if it is easy money to buy 50 cent widgets, pay 50 cent for transportation and sell them for $5 in an area where they are for sale for $10 then someone can make a further profit by arbitraging your new price - and that is before supply and demand come into play.
- askmike 8y ago
  At the end of the day arbitrage is zero sum, there is a fixed amount of money to be made from this market inefficiency (based on your margin, your costs and the amount you can buy and sell). Regardless if you are the only one doing it or not (if you are not you are competing for a piece of the pie). Note that the strategies described in this article are not arbitrage nor zero sum.

Really? I always thought the opposite is true: trading strategies work BECAUSE they get commodified. I mean, it's like self-fulfilling prophecy: if enough mutual funds managers look at the price chart, draw the same magic lines, apply the same magic formulas, then they reach the same conclusion "buy this stock". And then they start throwing their billions USD of assets at it, and the stock price actually starts climbing up.

adrianN 8y ago
But people who have better insight into the real performance of those companies can make more money if more people just apply magic formulas.
- askmike 8y ago
  The most successful fund for the last decade(s) fits more one the magic formulas side (the Medallion Fund from Renaissance Technologies). EDIT: Oops, I misread your comment.
simonh 8y ago
I think both can be true, depending on the details of the strategy and the conditions in which it’s valid. Sometimes common knowledge of a strategy can lead to the elimination of the situation in which it works. Participants can anticipate it and so the conditions no longer occur. In other cases so many participants pike into the strategy, in which there is only so much money to be made, that returns get so thin that only the very most efficient and smart participants can get anything out if it. Arbitrage is a good example, once its known it can get traded out of the market very rapidly.
- allahreturns 8y ago
  This is precisely what's happening with dropshpping. Now soon many people are interested in that, making money is lately just too difficult and most are making money selling courses to gullible people.
quantummkv 8y ago
The stock market is basically a transfer of wealth from one person to another. For a good strategy to work, someone has to make a bad strategy. If everyone gets a good commodity strategy and applies it you will end up in a stalemate. Maybe not instantly but somewhere down the line.

Nasrudith 8y ago

Especially if they are effectively arbitrage - if it is easy money to buy 50 cent widgets, pay 50 cent for transportation and sell them for $5 in an area where they are for sale for $10 then someone can make a further profit by arbitraging your new price - and that is before supply and demand come into play.

askmike 8y ago
At the end of the day arbitrage is zero sum, there is a fixed amount of money to be made from this market inefficiency (based on your margin, your costs and the amount you can buy and sell). Regardless if you are the only one doing it or not (if you are not you are competing for a piece of the pie). Note that the strategies described in this article are not arbitrage nor zero sum.