Get Over It – They Already “Stole” Your Trading Strategy

New traders think about strategies in a very peculiar way.  I started thinking about this today because I saw traffic from the following search term:

“is there anything i can do to protect my trading strategy”

Now, you may be wondering what this person wants to protect their strategy from.  Marauding bandits?  But maybe like me you’re not wondering, because you have (or had) the same anxiety.  The possibility that you’ll go to great lengths to discover a wonderful trading strategy, only to have someone else learn about it from you and make all the money.  This third party might learn your strategy because you told them, or more nefariously they might learn it without you knowing.  For example your broker might watch your trades, marvel at your amazing profitability, deduce the underlying strategy, and then duplicate (or even front run) it.

Please, please, please stop worrying about all this.  It looks like a legitimate fear, but it’s not.  The fear arises from a variety of misconceptions new traders have.  Address those misconceptions, and the fear will hopefully recede.

  • Misconception 1: Functional trading strategies are rare. This is simply not true.  Given the massive number of instruments, time frames, and general strategic approaches there are huge numbers of potentially profitable strategies.  If you break it down to the details of the strategy, there are certainly millions.  Even if you were to lose access to one of them for some reason, it should make at worst a minor difference to your long term profitability as a trader.  This misconception arises because new traders have such a hard time reaching consistent profitability.  It’s perfectly reasonable to think that if it takes you five years to be almost consistently profitable it could take another five to develop a new strategy were something to happen to the first one.  But in reality once you get the general principles down and get some success under your belt it’s like you’re in a giant field full of working strategies.  You can just pick up one and go.
  • Misconception 2: Another person, if they had your strategy, would trade it effectively.  I tried to take a shot at how silly this is in a previous post by means of a sports analogy.  But maybe you didn’t read that or don’t “get” sports or I didn’t quite get the point across, so let me try again here.  The difference between trading success and failure hinges only partially on what strategy you’re trading.  It hinges much more on your ability to execute that strategy to a high level.  Execute a slightly better than random strategy well, and you can make a lot of money.  Execute a brilliant strategy poorly enough, and you’ll lose everything you have.
  • Misconception 3: Your strategy will live forever (or a very long time).  Just accept it now.  Any trading strategy you have success with today will be essentially dead, or at least require radical change, over the course of a typical career.  Look at stock trading 15 years ago.  The big gold mine was fractional prices.  US stocks were priced in 1/16ths of a dollar, or slightly over six cents per tick.  Since the natural bid/ask gap for many typically priced stocks is smaller than that, it means most stocks had an artificially wide gap.  That in turn meant that conventional market making was more profitable than it should have been.  The market was rigged to benefit the market makers(and anyone else intelligent enough to figure out how to place a limit order).  In 2001 the SEC forced decimal trading on the exchanges, reducing most bid/ask gaps by a factor of two or more and an entire population of strategies died in screaming agony.  You’ll still encounter old timers who bitch about decimalization.  This is not an isolated case – analogous changes happen in every market all the time.  Every good strategy is going to die, including yours.  Plan on it, and realize that you’ll be OK.  You’ll just have to switch to something else.
  • Misconception 4: You’re the only one trading your strategy right now.  Your parents may have told you that you’re unique like a snowflake, but it just ain’t true.  There are lots of smart people in the markets.  Lots of dumb people too.  But the smart people tend to have the same smart ideas at about the same time.  So even though you’ve never told a soul about your trading strategy, there’s some other dude out there trading the exact same thing.  Or at least close enough that the difference in your results will come down to execution.  Hence the title of this post – your strategy was born already stolen.
  • Misconception 5: Someone’s actively working to steal your strategy.  Honestly no one cares, or at least no one with enough skill to execute your strategy effectively.  It’s easier for a skilled trader to work up a strategy from scratch than it is to borrow someone else’s.  With someone else’s strategy you have to be paranoid that you don’t fully understand it.  With your own, at least you know you understand it better than anyone else.  Of course this doesn’t mean skilled traders don’t pay attention to the landscape and what’s working.  They do.  But they rarely if ever run someone else’s stuff un-modified.
  • Misconception 6: You can’t coexist with someone else trading essentially the same strategy.  See misconception 4.  If your strategy is profitable you’re almost certainly already coexisting with other people doing the same thing.  Make no mistake – competition CAN hurt.  But it rarely hurts enough to make you unprofitable.  And if all the people using a given strategy are trading relatively small size, it may not really hurt you much at all.  There are a few exceptions – for example pure arbitrage strategies are very vulnerable to competition.  But these aren’t the strategies most retail traders deal with anyways.
  • Misconception 7: There’s not another strategy waiting for you.  Seriously, if you’re ever lacking for a strategy I’ve already posted two working ones (basic equities trend following and the beta neutral spreads on dividend stocks) and a solid hint as to a third (look carefully at the MSFT chart).  I’m working on a fourth but haven’t gotten to the details yet as of this writing.  I’ll get there – the only thing that’s prevented me from posting more is time constraints.  Here’s a nice little strategy from academia.  Here’s another.  So if whatever you’re doing now stops working, you can always use one of those.  And I’m sure I’ll eventually post more.  There’s no shortage of working strategies so you can just relax and focus on execution and risk control.
  • Misconception 8: Trading strategy vendors have super double secret strategies.  This is a pure marketing tactic.  They can’t sell you $800 seminars if they tell you that everyone in the industry already knows what they’re about to teach you.  If they want to get your money, they have to offer secret squirrel strategies you can only learn IF YOU SIGN UP NOW!  Of course it’s bullshit.

All of this explains in part why I post strategies on this website without alteration or obfuscation.  I’m not worried it will hurt me.  Do your due diligence and follow the trading system development process,  and then if you want to copy what I’m doing go right ahead.  I’m perfectly OK with that.  What I want to do is free you from the fear that strategies are some rare thing, and once lost you may never find another one.  Don’t worry about people stealing whatever you’re working on.  That’s just silly.  In fact I recommend you give it away for free if anyone asks, just to free yourself of the fear that it might be stolen.

One thought on “Get Over It – They Already “Stole” Your Trading Strategy

  1. Great call out on protecting your trading strategy – or the fallacy of doing so. I love the line “your strategy was already born stolen”, because it is so true. With millions of traders, whether you share or not, someone is looking at the same things as you everyday.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>