May

4

What Makes a Trading Strategy Work?

In quant trading finding an alpha is not enough.

What is the edge you have that others do not?

A backtest is not the hard part.

The hard part is explaining why the opportunity exists, why others have not competed it away, and why it should continue to exist in the future.

In practice, most real strategy edges come from one or more of these: …

Some good discussion in the comments also. In response to a question about spinoffs:

Tad Haley Spinoffs are one of the best examples of an opportunity that can be visible without being equally tradable.

The edge is often not in spotting the situation. It is in understanding who has to sell, who cannot own it, who can actually fund and hold it, and how long the implementation friction lasts.

That brings in mandate and tolerance, liquidity, balance sheet, and constraints all at once. Information still matters, especially in separating flow-driven weakness from real fundamental weakness, but a lot of the opportunity exists because the natural ownership base is temporarily broken.

Larry Williams responds:

Is it really that complex? You find out what fundamental conditions drive a market. Maybe it's supply, maybe it's good earnings, and take advantage of that impact.

Zubin Al Genubi comments:

Its good to understand market structure in addition to stats. Structure is changing from a few years ago.

Nils Poertner adds:

Excellent, Yes Zubin. Also the trader may change and develop a bit of an ego after yrs of success….that is why trading requires constant shedding of false personality.

Asindu Drileba writes:

I have also come across three recurring reasons why some edges still exist.

Liquidity: So common in the Bitcoin markets, more in smaller cryptos markets. I have heard people with serious AUM complain about how the can't deploy $30m positions. But small specs don't have this problem.

Impatience: Even though some long term strategies like following the drift, indexing, work people are impatient, often demanding salary like consistency from the market like Robert Bacon suggests.

High stress strategies: Some people are patient, though can't handle strategies that are profitable, but have a very high frequency of losses. I have suggested some (buy) options strategies to my friends, but they just can't endure the 70% to 90% losing rates.

Larry Williams writes:

The big edge is to think forward, to see the future before other people do there are fundamental facts to this game, like insider buying. Mister Brush has written so much about. There are advantages, and they're very simple.


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