Will FX methods become unprofitable once they spread? What is the answer by ChatGPT?
If there were a winning FX method, would it lose its edge and become unwinnable once that method spread?
In the case of EA, would it become unwinnable once it is sold 1,000 copies and used by many people?
In my case, I keep the logic as open as possible.
Since many of the main EAs are trend-following types, I believe that even if the logic is disclosed, the damage would be small.
I think Goto-day EA and morning scalping EA would lose their edge once the methods spread.
I asked this question to ChatGPT.
Will FX methods lose their edge if they become widespread?
Answer by ChatGPT
When FX methods spread, the number of traders using that method increases, which can potentially affect the market. Specifically, several points can be considered:
Deterioration of method effectiveness: If many traders use the same method, its effectiveness may diminish. When trading methods based on specific patterns or indicators spread, the market may price it in, reducing the method’s edge.
Changes in liquidity: As more traders use the same method, trades may cluster at certain times, causing liquidity to fluctuate. This can lead to changes in market volatility.
Market adaptation: Markets continually change, and they tend to adapt to widespread methods. This can cause previously effective methods to lose their effectiveness in the future.
Therefore, to continue succeeding in FX, it is important to respond flexibly to market changes, continuously learn and apply new methods and strategies. Diversification of methods and thorough risk management are also important factors.
Proceeding with another question
If you use a trend-following method, since everyone takes positions in the same direction, I think the edge would not disappear even if the method spreads. What do you think?
Answer by ChatGPT
The view on trend-following methods is interesting. Trend-following methods take positions in the direction of a market move when the market trends in a particular direction. If this method spreads, several considerations are important.
Strengthening the trend: If many traders use the same trend-following method, the market movement in one direction may become stronger. This is because many traders take positions simultaneously, reinforcing the trend.
Competition for entry points: If many traders use the same method, competition at specific entry points or price levels can become intense. This can make finding the optimal entry point more difficult.
Changes in volatility: If more traders use trend-following methods, market volatility may increase. This occurs when trends reverse or correct and many traders exit positions at once.
Market adaptation: The market adapts to traders’ behavior, so widespread use of the same method can alter market dynamics, reducing the method’s effectiveness. Especially as algorithmic trading evolves, the market quickly recognizes and adapts to new patterns.
While trend-following methods may temporarily strengthen the trend when spread, in the long term, changes and adaptations in the market may reduce that method’s edge. Therefore, traders must continually adapt by reviewing methods and introducing new strategies.
Continued questioning
Do you think morning scalping EA and goto-day EA lose their edge as the methods spread?
Answer by ChatGPT
If timing-based automated trading methods such as goto-day EA or morning scalping EA spread, their effects are likely to be affected. For the following reasons, such methods may lose their edge when widely adopted.
Goto-day EA
Goto-day(days ending in 5 and 0) tend to see Japanese companies buying dollars to pay import bills. When a method expects specific moves on these days, it is prone to the following effects.
Deterioration of market predictability: If many traders are aware of goto-day and trade accordingly, the market begins to price in that move. As a result, the expected move becomes less likely, and the method’s effectiveness declines.
Price distortion: If more traders take positions in the same direction, prices may move unnaturally for a time. This can strengthen the trend, but subsequent reversals may be larger.
Morning Scalp EA
Morning scalping EA aims to capture short-term price moves during the early morning when liquidity is low. If many traders adopt the same strategy, the following effects may occur.
Spread widening: When many traders trade simultaneously in a low-liquidity period, spreads can widen. This increases trading costs and reduces profits.
Reduced predictability of moves: If many traders target the same short-term price moves, market dynamics become harder to predict, reducing the method’s effectiveness.
Increased competition for trades: When many traders enter or exit at the same times, executing trades at optimal prices becomes harder, potentially reducing performance.
If a method is based on specific days or times and becomes widespread, its edge is likely to diminish. Since the market adapts to participants’ behavior, widespread adoption can make expected moves harder to realize and trading costs can rise. Therefore, to continue succeeding, diversification of methods and flexibility to adapt to market changes are important.
My conclusion
I believe morning scalping EA, goto-day EA, and contrarian scalping strategies lose their edge when the method spreads.
However, I think trend-following swing strategies do not immediately lose their edge simply because the method becomes widespread.
As ChatGPT notes in its answer about trend-following methods: “If many traders use the same trend-following method, the market may trend more strongly in one direction.” This supports why trends can strengthen.
As long as a market like this endures, I think in-direction trading remains the strongest.
There is a comment section further down in this article.
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