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Why Retail Traders Can hardly Get an Edge…and How to Change It

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  • Why Retail Traders Can hardly Get an Edge…and How to Change It

    Advanced technology has changed the rules of the game–making retail traders’ skills less effective, if not altogether obsolete.

    There’s a high probability that both your trading skills and technology are making you an easy target for the more technologically-advanced trader–that is, the professional trader. The inherent qualities of your trading methodology, platform, indicators, or charts have not changed. It’s just that their operational environment has been transformed to such an extent that you are not applying your skills to the wrong game.

    Professional-grade skills, based on the new technologies they use, are continually changing the rules of the game, and most retail traders just don’t see it. If you are like most retail traders, you are fighting yesterday’s battle in today’s markets.

    This makes you an easy target–something that professionals want, as it increases their profit potential multifold.



    Many Retail traders often don’t realize that the platforms made available to them are so outmoded, that by simply using them, they give professional traders an edge.

    In the futures industry, most brokerages offer platforms with lots of bells and whistles–market analytics, indicators, charts, and even fully automated trading software. Retail traders either trade manually using “sophisticated” software, or they allow a machine to do all of their thinking and trading for them. Both are losing propositions.

    Professionals integrate “smart technologies” that both learn and assist them based on their pre-defined strategies and parameters. Professionals use responsive semi-automation, which functions more as an intelligent (thinking) machine in contrast to a non-intelligent “tool.”

    The irony is that most retail traders–in their “main” professions–would never tolerate outdated technologies, software, or apps. Yet in the markets, they are willing to sacrifice competitiveness and profits for lower prices and a feeling of comfortable familiarity.

    This tendency marks one critical difference between the professional and retail trader.

    As a retail trader, you are not “forced” to conduct R&D, nor are you forced to adopt technological innovations that are disrupting the business environment.

    Without the burden of such inconveniences, retail traders can stay within their comfort zones. They may lose money consistently, but they don’t have to risk venturing into unknown territory…even if such a venture may lead to greater capacity and profit potential.

    Essentially, the observation of such habits can only lead one to speculate that retail traders view trading as an expensive form of entertainment rather than a business–another critical difference between professionals and retail traders.

    How to get a real edge in trading the markets
    1. Adapt your skills and technologies to the new market environment: There’s a popular saying whose origins are attributable to the 1987 film The Untouchables: “Never bring a knife to a gunfight.” Essentially, retail traders often do the exact opposite of this wise piece of street advice. As a result, they always get slaughtered. It doesn’t have to be this way. Just bring the right arsenal to the arena.
    2. Use semi-automated software: The concept is fairly easy to understand, but most people would make the erroneous assumption that “full-automation, which is commonly available, is the subsequent progression of semi-automated software. It is not. Semi-automation is a smart tool. Unlike fully-automated software, semi-automation expands rather than controls or confines a trader’s potential. This infographic illustrates how semi-automation far exceeds any manual trading process.
    3. Be willing to spend a little more money for a greater payoff in trading profits: This is the one factor that separates professionals from the retail crowd. Zero to little investment in technology = expensive losses in the market. Technologies with lots of bells and whistles and a fancy look are meaningless if they can’t help you profit. Here is a case study on users of Agena Trader software. Although not much more expensive than the average trading platform, Agena’s added value makes it stand apart from almost of all retail platforms.
    4. Be willing to upgrade your skills: progress is never a static phenomenon. To adapt to the new market environment, you need to learn how to use new technologies and to match your current skills to both the new environment and new technologies. In today’s markets, only the adaptive survive. But only the disruptive will truly thrive – AgenaTrader will help you.


    Disclaimer:

    Exchange transactions are associated with significant risks. Those who trade on the financial and commodity markets must familiarize themselves with these risks. Possible analyses, techniques and methods presented here are not an invitation to trade on the financial and commodity markets. They serve only for illustration, further education, and information purposes, and do not constitute investment advice or personal recommendations in any way. They are intended only to facilitate the customer’s investment decision, and do not replace the advice of an investor or specific investment advice. The customer trades completely at his or her own risk.


  • #2
    As a floor trader we had a HUGE EDGE over the retail trader back in the day. With the advent of electronic trading that EDGE is gone. Here are some thoughts from a few of us dinosaur traders.

    Adapt or die. In a world of high-frequency traders, if you can’t beat ‘em, join ‘em – or at least adjust your old-school approach to trading and take advantage of big data analysis and other technological advances to try to get an edge.

    Chicago’s pit traders have largely failed to adapt, leaving their lucrative jobs to run restaurants or become careers coaches. Everywhere, traders over the age of 30 are trying to figure out how they can possibly use their skills outside of the large financial services organisations which no longer want to employ them.

    Lewis Borsellino, the co-founder of ManOverMarket who made a name for himself as a formidable S&P 500 futures trader in the ‘80s and ‘90s, has managed to survive in the new era of e-trading. He told the Trading Show Chicago 2016 how he did this. The highest of highs and the lowest of lows

    “In 1987 I made $4.2m and was written up in the press as the biggest single futures trader,” Borsellino said. “One time I made $1.4m in about 15 seconds – it was the biggest trade of my life.

    “I had to cancel my vacation and fly back in to work on Black Monday [October 19, 1987],” he said. “In 1988, I made 90 grand – Wall Street was dismantled, and there was no more business for a time.

    “After the market rebounded, I knew guys barely out of college who were making $1m or $2m a year standing on the trading floor – now they make a lot of money if they can program algorithmic trading.”

    Borsellino said that while the relationship between man and market is constantly evolving, the core principles of successful trading haven’t really changed.

    The notions of split-second decision-making, luck and fearless aggression in the S&P futures pit can translate to the electronic trading arena.

    “The people who generate trading, the institutions, the banks the hedge funds, they drive the market,” Borsellino said. “These institutions have the advantage; they have more money than us. We smaller traders have to find ways to compete with them, because we don’t have the deep pockets they do,” he said. College athletes trump Ivy League brainiacs

    Borsellino’s idea of the best prospective traders is not what you’d expect.

    “Being a good trader on the floor of the exchange and now on a computer, you don’t have to be super smart,” Borsellino said. “I always looked for college athletes, or guys who barely graduated high school, joined the military and then became a trader. They were more likely to work hard, do research and stick to the plan. The guys who were really smart thought they were smarter than the market and often didn’t have the personality or the stomach to endure big trading losses.” Leveling the playing field with electronic trading

    In 1998, the exchanges’ stated plan was to control latency. They never actually did.

    “They realized if they let the high-frequency trading guys in they could double or triple the commissions,” Borsellino said.

    Co-location allows trading firms to gain an unfair advantage, he said.

    To compete with institutional traders, Borsellino recommends finding or developing software that can identify institutional order flow and recreate the energy and signals of a trading floor. He uses XtremeData to power his own proprietary platform.

    “The last piece of the trading puzzle is recreating order flow and identifying the institutional order flow and algorithms,” he said. “Reverse engineer the order process.

    “Our team can download tic data daily, down to the microseconds, and analyze order flow, including the size of match trades; order book and cancel/replace requests; the rate of change of order entry; and identifying monolithic trades – 30 transactions in 1 microsecond.”

    Borsellino said that you have to use computers to help your analysis, but there’s a move back to people who are experienced in trading, “who know what they don’t know and respect the markets.”

    The moment you say the market can’t do that, it does that.

    “CME pit traders like me always prefer to trade from the short side,” Borsellino said. “We’re always waiting for a disaster, something to keep the markets going crazy.

    “The volatility’s got me excited,” he said.

    Comment

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