Is there a bigger game of mental masturbation in finance than our collective obsession with the perpetual money machine? The single greatest lie in the markets is that we can just create a 24/7 trading algo that will print money for us the way the Fed prints credit.
It doesn't matter if you are an MIT finance professor like Andrew Lo, a multibillion dollar fund like AQR or just a regular joe schmoe with a simple moving average MetaTrader EA, real life markets will always decimate whatever well crafted piece of statistical wizardry you’ve created. Don’t take my word for it. Just look at long term records of these systems - not the beautifully curated, irrefutably argued backtests - but the actual real life performance and you quickly realize that a stack of T-bills would have done a better job and cash under the mattress wouldn’t have done much worse.
The latest darling to fall victim to the harsh bitch slap of life is the Dual Momentum strategy - which I must admit I really liked on intellectual grounds - but as Michael Harris in @priceactionlab notes, this super-duper-much-better-than-the-index approach got absolutely pulverized over the past eight years as the correlation between stock and bonds went from negative to positive.
Why do all systems fail in the end? Because we are always focusing on the wrong problem. As system creators all of us - and no one more guilty of this than yours truly - obsess over every minor detail of the how. Is the time range correct? Should we use a VWAP filter? Can we go 10 million years in the past to show how well it worked in the The Pleistocene Epoch?
You get the idea.
But here is the dirty little secret of system trading. The “how” doesn’t matter. Well it matters a bit, but just a little bit. All real market success of system trading depends on “when” not “how”. The truth of the matter is that there is no system in the world that will not be destroyed by some mutation of the market regime that will appear in the future. And it doesn’t matter if you trade on the minute chart or never look at your investments for decades. Think buy and hold is sacrosanct? Ask a Tokyo bag holder who bought the NIkkei at 38,957.44 and is still under water by more than 10,000 points thirty plus years later. As John Maynard Keyens - one of the greatest investors that ever lived - once quipped, “In the long run we are all dead.”
In the BK chat room we trade on the one minute chart, which certainly can seem overwhelming to some but the upside is that we get feedback very quickly and fail fast. Nothing has made a bigger impact on our P/L then when I learned to turn the algo OFF. The system trades the rules that have been in place for years, except now the algo goes to sleep for large swaths of the global day - and guess what? Unlike in real life, doing nothing in the markets is actually a lot more profitable.
Please note that I am not arguing that simply turning a system on or off will solve all of the profitability problems. Trading will always remain an art as much as a science because volatility and correlations (just a fancy way of saying people’s reaction to the news) will be different going forward than they were in the past. But here is what I know for sure. There is no good trading system. There is only a trading system good for its time. It’s never really about the how. A simple straight line on the chart is as good as a multivariate function. It’s always a matter of “when”, so take all the magic money machine claims with a barrel of salt. In the end they are always a lie.
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.
Editors’ Picks
EUR/USD stays in positive territory above 1.0850 after US data
![EUR/USD stays in positive territory above 1.0850 after US data](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/money-euro-and-dollar-banknotes-17371247_XtraSmall.jpg)
EUR/USD clings to modest daily gains above 1.0850 in the second half of the day on Friday. The improving risk mood makes it difficult for the US Dollar to hold its ground after PCE inflation data, helping the pair edge higher ahead of the weekend.
GBP/USD stabilizes above 1.2850 as risk mood improves
![GBP/USD stabilizes above 1.2850 as risk mood improves](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/strong-pound-weak-dollar-17536259_XtraSmall.jpg)
GBP/USD maintains recovery momentum and fluctuates above 1.2850 in the American session on Friday. The positive shift seen in risk mood doesn't allow the US Dollar to preserve its strength and supports the pair.
Gold rebounds above $2,380 as US yields stretch lower
![Gold rebounds above $2,380 as US yields stretch lower](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/gold-gm187363896-28836378_XtraSmall.jpg)
Following a quiet European session, Gold gathers bullish momentum and trades decisively higher on the day above $2,380. The benchmark 10-year US Treasury bond yield loses more than 1% on the day after US PCE inflation data, fuelling XAU/USD's upside.
Avalanche price sets for a rally following retest of key support level
![Avalanche price sets for a rally following retest of key support level](https://editorial.fxstreet.com/images/Avalanche/Avalanche_XtraSmall.jpg)
Avalanche (AVAX) price bounced off the $26.34 support level to trade at $27.95 as of Friday. Growing on-chain development activity indicates a potential bullish move in the coming days.
The election, Trump's Dollar policy, and the future of the Yen
![The election, Trump's Dollar policy, and the future of the Yen](https://editorial.fxstreet.com/images/Macroeconomics/Events/US%20Elections/Donald_Trump_closeup_XtraSmall.jpg)
After an assassination attempt on former President Donald Trump and drop out of President Biden, Kamala Harris has been endorsed as the Democratic candidate to compete against Trump in the upcoming November US presidential election.
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