In my view, the predominant mistake made by those who seek to create profitable strategies is that they approach trading as if the market is a zero-sum game. In particular, doing things that harm the markets, like naively adding to existing momentum, is just promoting price overshoot and instability by reinforcing positive feedback loops. Such approaches hurt others and while they might make money for long periods of time, they will almost surely end up losing all that profit and more during a small number of extreme market events.
If you want to be reliably profitable, you need to first understand how the markets are not a zero-sum game and then you need to construct methods to improve the markets with your trading. There are countless ways that markets deviate from truly efficient behavior. Find some and develop strategies in areas that can benefit from your cognitive, experiential, and educational strengths. General examples of how one might improve the markets include things like providing liquidity when it's needed, limiting price overshoots when it's warranted, and incorporating new information about instrument values. The market will pay you in return if you do such things in a sound way. As long as you also do a good job of estimating and limiting your risk, you can be consistently profitable.
There will be no significant public disclosures of detailed ways to trade profitably. The markets rely on the robustness provided by many different points of view addressing market needs in a variety of ways. Any parties that overweight one of those points of view will ultimately lose money in the process of adding market instability. There's too much of that already. Don't trade until you figure out how to make the markets better.
> you need to construct methods to improve the markets with your trading
What percentage of traders do you think will approach the market with such altruism?
I think the markets are way too complex to rationalize "improving a market". Markets are by definition good markets when you have long term and short term traders mixed in with technical and fundamental traders all with different alpha time horizons. This is a healthy market.
If you're a speculator, so be it. As you point out, the market may teach you a lesson at some point. Those guys go away but new ones will join.
It's a beautiful virtuous cycle.
Not to say there aren't bad actors. Most speculators are not IMHO. But they cross the line when they undertake certain market activities, like spoofing for example. This is why good markets also have good regulatory oversight (finra, sec... )
> What percentage of traders do you think will approach the market with such altruism?
Approximately 0%. I don't know of any entities that trade as a nonprofit. The point is that if you find something the market needs, you will have inherently discovered an opportunity that can make money because there is demand which exceeds supply for the service. As an additional benefit, such strategies are unlikely to run afoul of regulatory oversight or be eliminated through future rule changes.
> I think the markets are way too complex to rationalize "improving a market".
This is not rationalizing, it is about how to effectively identify profitable opportunities. Let's turn the argument around. Do you expect a trading strategy that harms a market to be reliably profitable without risking fines, banning, or imprisonment? If you don't, then it probably makes sense to exclude such approaches from your strategy search space. Additionally, I would argue that strategies which are of neutral benefit to the markets are likely to generate small returns relative to their risk because entities on the other side of your trades are not receiving value and thus the market is more likely to turn against you. If we eliminate "harmful" and "neutral", we're left with "beneficial".
> Do you expect a trading strategy that harms a market to be reliably profitable without risking fines, banning, or imprisonment?
Non-trader here, what do you mean by a particular trading strategy "harm[ing] a market," how would you actually measure harm to a market by a given trading strategy, and would whatever metric you decide on for that not just be a dressed-up subjective argument?
By "harming a market", I mean "causing a market to be less efficient". It is typically easier to identify harmful behavior than it is to quantify the amount of harm caused. Sometimes you can easily estimate a rough lower bound on the harm's cost. Easier cases include 1) Spoofing, where you could estimate the harm as being greater than the captured profit, and 2) Self-trading for the purpose of receiving liquidity provider incentives, where you could estimate the harm as being greater than the incentives received. Harder cases include situations where poor strategies caused market instability by underestimating risk or trading in a way that is too similar to others. Extreme examples of these include the Long-Term Capital Management (LTCM) blowout in 1998, the 2010 Flash Crash, or any number of firms that contributed to the financial crisis of 2007-2008. You should be able to find plenty of academic papers attempting to quantify the harm of those.
What are good resources for reading up in very granular executional detail how others have made markets better historically with strategies that presumably are no longer delivering alpha because they've run their course for whatever reason?
I don't think you're going to find much execution detail that is credible in that context. There is plenty of higher-level analysis of such things. You might start with Andrew Lo's papers and work your way out from there.
If you want to be reliably profitable, you need to first understand how the markets are not a zero-sum game and then you need to construct methods to improve the markets with your trading. There are countless ways that markets deviate from truly efficient behavior. Find some and develop strategies in areas that can benefit from your cognitive, experiential, and educational strengths. General examples of how one might improve the markets include things like providing liquidity when it's needed, limiting price overshoots when it's warranted, and incorporating new information about instrument values. The market will pay you in return if you do such things in a sound way. As long as you also do a good job of estimating and limiting your risk, you can be consistently profitable.
There will be no significant public disclosures of detailed ways to trade profitably. The markets rely on the robustness provided by many different points of view addressing market needs in a variety of ways. Any parties that overweight one of those points of view will ultimately lose money in the process of adding market instability. There's too much of that already. Don't trade until you figure out how to make the markets better.