Numerous publications talk about the concept of a system ceasing to be profitable simply because it becomes too well known. The theory goes that a profitable system, once discovered by every other trader, will quickly become unprofitable. I am fairly new to system development and I wondered if anyone could shed some light on the reasons why this occurs. Not why people discover systems (that's clear) but how their discovery makes systems unworkable. All the literature I've consulted on this point talks in vague terms e.g. "everyone sees it coming and spoils it for everyone else" or "with so much money taking up the position, the inefficiency is lost" or "the smart money fades the position". If we take a simple system based on long trades on the formation of triangles (let's assume there is a positive expectancy), how does everyone's recognition of a triangle distort the position? If everyone sees the triangle and everyone wants to go long then how has the position become spoilt? Similarly, how do I or how do we (as a market) hope to fade buyers of the triangle? What I was most interested in, in reading the literature, was Alan Farley's "The Master Swing Trader". He talked with much humour of how he sees a pattern developing and waits for all the longs (like lambs to the slaughter) take up a position (i.e. price goes north) before he then fades the position. How does he do that? I could understand fading a position where it's clear buyers have started to lose the initiative but otherwise? Farley says that in the modern era where everyone has whizzbang technology and every Jimmy Trader can spot a basic pattern, small traders' equity is hit hard. Can anyone educate me here to the specific dynamics/market psychology at work? Please reply on the point.
Best of luck to you all for the coming financial year.