Some background: I am no quant PhD, and certainly no hedge fund guy. I am just an engineer with decent programming skill.
I have spent a small part of the last 2 years developing and building a pretty simple intra-day trend-following system (fully automated) focussed on currencies. No fancy indicators, just signals based of when price exceeds a simple moving average. After a bunch of backtesting and paper trading, I'm seeing that it actually makes good return and I just started live trading with it.
BT results: Sharpe > 1.7, with tight stop losses.
While I was happy, I was also quite suspicious to see this working as well. Can someone help me intuit how such systems work?
- What are the market forces making this system work?
- Is this effectively taking money from less sophisticated traders? Or, am I riding the wave with smart money who just don't mind taking smaller losses which are actually quite meaningful for retail traders?
- Why haven't hedge funds/smarter people arbitraged or sucked the alpha out of my system?
- I've read Ernest Chan's books and it seems that this might be related to 'capacity' but I am still not sure why it is actually working.
Thanks in advance.