Why published trading strategies rarely work


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When you browse finance-related websites, it doesn’t take long for you to see ads that claim that they can help you make money, fast.

“I’VE BEEN ABLE TO WIN ON 90% OF MY TRADES WITH THIS PROVEN STRATEGY.” – TYPICAL AD #1

“LET ME SHOW YOU HOW TO EARN 25% RETURNS, GUARANTEED.” – TYPICAL AD #2

“SIGN UP FOR MY NEWSLETTER AND I’LL SHARE WITH YOU THREE STOCKS THAT ARE READY TO EXPLODE.” – TYPICAL AD #3

I don’t like these ads, because almost none of these trading strategies actually work.

How people sell their trading strategies

Newsletters

Some will offer you to subscribe to a paid newsletter, where you can get their market views and trading strategies for a fee.

Books

You can read all about a winning trading strategy through a book on Amazon or an e-book through the internet.

Trading courses

You can sign-up for courses where an expert will share all of their winning trading strategies with you.

Software

Salespeople or websites will offer proprietary software that can help you trade.

If your trading strategy is so good, why share it?

Implicit in all of these sales pitches is that they could not make more money using the trading strategy themselves. Sure, they will claim that they made a bunch of money and want to share their trading secrets with you (for a fee of course).

But Wall Street is not an altruistic profession like medicine. They are offering you their trading strategies because selling the book or the newsletter makes them money. They make more money selling the trading strategy than they could make by keeping it to themselves.

If you had a winning trading strategy, why would you share it with the world? I wouldn’t tell anyone and continue making money until someone figured out what I was doing.

Winning trading strategies don’t persist if you share them

Fischer Black and Myron Scholes discovered how to price stock options in the early 1970s. Their formula, the Black-Scholes formula, would eventually win Dr. Scholes the Nobel Prize (Fischer Black would have likely shared the Nobel Prize if he hadn’t died in 1995).

Before Drs. Black and Scholes published their famous option pricing formula in 1973, they had been teaching the method to students at MIT and the University of Chicago. These students eventually became traders and were crushing the other pit traders, who were using intuition and experience to price the securities. Once the formula was published, though, everyone knew what the options were worth, and their trading advantages disappeared.

People who actually make money in the stock market generally don’t share their secrets

There are clearly cases of winning traders in finance today. Jim Simons, who runs the wildly successful Renaissance Technologies, is intensely secretive about his trading strategies. No one really knows how they make money, other than that he gathered a bunch of scientists with PhDs and no prior experience in economics and finance and had them build mathematical models to print money in the financial markets. He has a winning formula, but he sure isn’t sharing it with anyone. He has become a billionaire by keeping his trading strategies secret, and he stands to earn many more billions that way.

Conclusion

Everyone is looking for that magic trading strategy that will help them beat the market. If they find it, they are unlikely to share it with you. The people who are known to have winning trading strategies closely guard them. Famous academics have had mixed results when trying their hand to beat the stock market. Be wary when people pitch you their newsletter or trading system.

What do you think? Have you ever subscribed to a trading newsletter? If you held a winning trading strategy, would you publish it in a finance journal, sell it in a book or keep it to yourself?

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

Image credit: Shutterstock.com


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