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It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average.

It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average. If you can find any reliably bad strategy (in a fee-less market), then you have necessarily found an outperforming strategy that is the opposite.

clairity 6y ago
not any strategy, but any strategy that's reasonably close to the efficient frontier of possible portfolios.
- andylei 6y ago
  actually, on average, all strategies will perform the same as the market. another way of saying this is: the average of all trading strategies is the market.
  - clairity 6y ago
    no, most strategies necessarily will be losers if not near the efficient frontier. trades average out to the market. the parent, maybe mistakenly, stated any strategy will have average returns, but consider the naive strategy of putting all of your money in a small number of (often highly correlated) stocks. that trading strategy will underperform the market on average.
  - jmwilson 6y ago
    That's not a helpful way of looking at things since individuals do not trade the average strategy. They trade whatever theory they are seeking to validate, which is too often "their gut" or the latest technical analysis woo. These people are cannon fodder for algorithmic traders and market makers. The average of all retail trader strategies is definitely not the market.
Apes 6y ago
Your theory only works with a perfectly efficient market. In practice, even without commissions, there are many other sources of inefficiency in the market that act to reduce your returns every time you trade. The bid/ask spread is an example of such an inefficiency. Take a hypothetical case where you just buy and sell the exact same stock over and over, but the price of the stock never changes. Every time you complete a bid or sell order, you would lose an amount equal to the gap between the bid and ask prices. Repeat the cycle enough times, and you will lose all your money, but the stock price will never have changed. What's the opposite of this strategy? To never trade at all? The idea that you can just reverse a losing trading strategy to come up with a winning strategy is absurd, because it completely disregards the entropy inherent to an inefficient system.
- Matheus28 6y ago
  > What's the opposite of this strategy? Being the market maker creating that spread. Who also gets financial incentives from the exchange for doing so.
jaredtn 6y ago
Eh, if I wanted bankrupt a trading account by playing a reliably bad strategy, I'd buy deep out-of-the-money options expiring this Friday. The expected value is $0 (neither positive nor negative), but they have only a miniscule probability of profitability.
- socketnaut 6y ago
  When you say "expected value" are you trying to say most likely value?
  - jaredtn 6y ago
    No, I mean the mathematical mean, not mode. If you take this action infinitely many times, what is your average (mean) return? https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value
    - socketnaut 6y ago
      I see, so you're saying the expected profit on the trade is $0 assuming an efficient market and ignoring trading costs? Your comment is confusing the way it's worded because the expected value of the option is non-zero.
      - jaredtn 6y ago
        Ah, sorry for that. I meant E[return on option - cost of option] ~= 0.
- Bubbadoo 6y ago
  The idea of buying deep OTM options is that they are 1. cheap 2. still have the possibility of turning green prior to expiry.
socketnaut 6y ago
You can reliably lose money in absence of commissions by buying at the ask and selling at the bid. You can't invert that to make money.
- TuringNYC 6y ago
  You can invert it by becoming a market maker, though you'll need some heavy tech for that.
tripletao 6y ago
First, that's true-ish in an expected value sense, not a Sharpe ratio sense. Even then, it's true only neglecting bid-ask spread (if you take liquidity) or adverse selection (otherwise). But the big effect is behavioral, that for the average person, if you can stomach actually implementing a strategy with your own money then that increases the chance it's a loser.

clairity 6y ago

not any strategy, but any strategy that's reasonably close to the efficient frontier of possible portfolios.

andylei 6y ago
actually, on average, all strategies will perform the same as the market. another way of saying this is: the average of all trading strategies is the market.
- clairity 6y ago
  no, most strategies necessarily will be losers if not near the efficient frontier. trades average out to the market. the parent, maybe mistakenly, stated any strategy will have average returns, but consider the naive strategy of putting all of your money in a small number of (often highly correlated) stocks. that trading strategy will underperform the market on average.
- jmwilson 6y ago
  That's not a helpful way of looking at things since individuals do not trade the average strategy. They trade whatever theory they are seeking to validate, which is too often "their gut" or the latest technical analysis woo. These people are cannon fodder for algorithmic traders and market makers. The average of all retail trader strategies is definitely not the market.

Apes 6y ago

Your theory only works with a perfectly efficient market. In practice, even without commissions, there are many other sources of inefficiency in the market that act to reduce your returns every time you trade. The bid/ask spread is an example of such an inefficiency. Take a hypothetical case where you just buy and sell the exact same stock over and over, but the price of the stock never changes. Every time you complete a bid or sell order, you would lose an amount equal to the gap between the bid and ask prices. Repeat the cycle enough times, and you will lose all your money, but the stock price will never have changed. What's the opposite of this strategy? To never trade at all? The idea that you can just reverse a losing trading strategy to come up with a winning strategy is absurd, because it completely disregards the entropy inherent to an inefficient system.

Matheus28 6y ago
> What's the opposite of this strategy? Being the market maker creating that spread. Who also gets financial incentives from the exchange for doing so.

jaredtn 6y ago

Eh, if I wanted bankrupt a trading account by playing a reliably bad strategy, I'd buy deep out-of-the-money options expiring this Friday. The expected value is $0 (neither positive nor negative), but they have only a miniscule probability of profitability.

socketnaut 6y ago
When you say "expected value" are you trying to say most likely value?
- jaredtn 6y ago
  No, I mean the mathematical mean, not mode. If you take this action infinitely many times, what is your average (mean) return? https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value
  - socketnaut 6y ago
    I see, so you're saying the expected profit on the trade is $0 assuming an efficient market and ignoring trading costs? Your comment is confusing the way it's worded because the expected value of the option is non-zero.
    - jaredtn 6y ago
      Ah, sorry for that. I meant E[return on option - cost of option] ~= 0.
Bubbadoo 6y ago
The idea of buying deep OTM options is that they are 1. cheap 2. still have the possibility of turning green prior to expiry.

socketnaut 6y ago

You can reliably lose money in absence of commissions by buying at the ask and selling at the bid. You can't invert that to make money.

TuringNYC 6y ago
You can invert it by becoming a market maker, though you'll need some heavy tech for that.

tripletao 6y ago

First, that's true-ish in an expected value sense, not a Sharpe ratio sense. Even then, it's true only neglecting bid-ask spread (if you take liquidity) or adverse selection (otherwise). But the big effect is behavioral, that for the average person, if you can stomach actually implementing a strategy with your own money then that increases the chance it's a loser.