Can a Retail Trader Succeed at Algorithmic Trading? (Part 5)

I have been presenting and discussing a thread regarding algorithmic trading that took place in a popular online forum about 18 months ago.

I left off with a reply that concludes:

     > We live in a time where funding is not extremely difficult. From instant loans to
     > credit cards to friends and family to mortgages — if you have an extremely good
     > algo then you’ll get the funds. If you cannot get the funds then you’re probably
     > not smart enough to participate in the industry anyway. Consider it a test.

This reply included some really good points until now when some credibility is lost. I think fundraising is extremely difficult. Then again: 1. I have yet to generate an “extremely good algo” and; 2. maybe I am not smart enough (see third paragraph here about nothing unique) to participate in the industry.

     > As KD said: fitting a strategy to past data is the biggest “crime” I see developers
     > making. But every strategy is dependent on past data at the very least for pattern
     > recognition. When we say a strategy doesn’t “work” anymore, what we’re really
     > saying is that we can’t wait around 50-100 years for it to work again. Because it
     > probably will work again given enough time.

Five stars for this reply, baby! Countless times have I heard/read people say that trading systems break never to be profitable again. One reason for this could be because more and more people trade them, which can kill the edge. As time passes, the number of available strategies approaches infinity faster than the number of traders, which suggests a decreasing likelihood that a particular strategy will be traded live. I therefore believe that strategies no longer in vogue can be profitable again years after their trading frequency diminishes.

Incidentally, this reminds me of the Callan Periodic Table of Investment Returns where we frequently see asset classes that significantly underperform in previous year(s) suddenly start to outperform going forward (the cycle may repeat).

     > De Prado’s point is that since all strategies have a shelf life, you need a team to
     > build a strategy factory for true long term success. He is also not talking about
     > retail but about other’s people money. You can’t take the risk free or index rate
     > for 2 years with OPM while you figure out a new winning strategy without going
     > out of business. A single retail trader could do exactly that.

This is interesting rationale for a team-based approach to trading strategy development. For this and other reasons, I agree with the approach (also discussed in Part 1).

Use of the term “strategy factory” is notable here, too.

I will continue next time.