system development comments

I would say that conceptually most successful trading systems capitalize on capturing herd behavior; the edge is simply derived from quantifying and mechanizing this behavior. If the herd change how they collectively react to these various factors, then there goes your edge. The bet - or, I suppose, the lucky or uncertain element - is the belief that aspects of human nature dictate that the crowd will always react in this way (obviously given a sufficient sample size, etc). It is merely a belief and that is all it can ever be.

The part that puzzles me about this whole debate is that it really seems no different than any undertaking that isn't governed by completely fixed rules and probabilities. Casinos and certain card games fall into this category; the long-term statistical outcome may not be favorable for the participant, but at least it can be accurately relied upon. In all other cases, you simply do the best you can, making reasonable extrapolations from the data available to you. If you are starting a business, for instance, you would determine all of the various supply and demand factors that might contribute to your success: other competitors in the market, demand elasticity for your product, etc. Does this ensure your success? Of course not, since any of these things could change at any time.

So, I agree with Tdion in the sense that 'luck' plays a role in trading, as it does in pretty much everything. As Merlin said, though, it is about having a market premise(s) that you believe in, and that you don't feel is broadly subject to change. Once you have that, even though it COULD stop working, the feeling that you are simply being lucky goes away and is replaced by a humble gratitude that your system continues to capture your broad understanding, and that your understanding itself is still holding true. Either that, or your edge involves some specific loophole (like darkstar with oanda) and you hope that it never becomes widely exploited and dries up.

Btw, congrats on being up 4000% in 9 months. I had never given much thought to such a high return/risk strategy with a small amount of truly risk capital, but it certainly has its merits. I have found that when managing clients, people are far happier not having large drawdowns than they are with industry-exceptional returns; if anything, they are actually incredulous if you're returns are fairly high. Sad but true. For a portion my own capital, however, I think that I may just try such an approach!

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