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How does one compete with the HFT'S ( high frequency traders ) of the big institutions using robots? I just read where more than 60 % of the volume traded on all the exchanges is of this type.
Can you help answer these questions from other members on NexusFi?
Simply put, you don't.
Do not try to compete with these co-located algos.
You would have to develop amazing algorithms, which you will very likely fail at, but if you should really succeed in developing a system, you still would have to implement it. Co-located servers and incredibly low transaction costs are probably the two core things you would have to get.
So you better don't compete with them and trade significantly higher time frames. If you trade a eg even something as small as 2min chart (which by the way is way too small for most traders), you would not have to compete with them. The hfts are not interested in such 'long term investment' .
BUT, if you think you cannot succeed, please don't trade as you will certainly fail. The belief that you will succeed is by no means a guaranty for success, but it is an absolute prerequisite for success.
The little guy can't compete with the nano-traders, and to be honest, before that the funds controlled the market. Years ago Fidelity alone accounted for "about 12%" or more of the daily NYSE volume. To have ANY hope of success , you have to find a niche that you understand & are comfortable with. - You might consider etf's or small, even micro caps on say the Russell. - The "little guy" doesn't control the market, and frankly never has, - unfortunately, it's just gone downhill even further lately.
First off the answer is YES you can “win” in this market, but my idea of winning is to make a really good solid return. If you mean can you come in here read post for a week and build an HFT system that will kick butt, of course not. The faster the frequency, the closer you get to the world of the algos and yes they have a big edge. To put it another way if you have a $10,000 account nothing you find here will make you a million in 10 years.
However, I can show you a (simple stupid) trading strategy right now that can outperform most mutual funds. Create weekly chart of the SPY and run a 19 week and 29 week SMA. Go long with some ETF like IWN when the 19 SMA line is over the 29 and go short with an ETF like SH below the line. At year-end sweep all your profits into ETF called SDY. In 20 years you will be up more than if you bought bonds or invested in 80% of the mutual funds on the market. There see you can win, but your return is going to be about prime plus 6%.
Now lets say you are like me and greedy, now you want to up your return. That’s is going to take a lot of work, a lot of studying and few trips to the university of “I blew my account up”. Not to mention the social life and health issues of staring into screens for hours on end writing programs or trading live. When you are all done don’t be surprised if you cannot generate more than 20% per year. I picked the 20% ceiling because that’s what Berniee Madoff used as his return for his famous hedge fund scam. A man named Harry Markopolos knew Bernie Madoff was a fraud way back in 2000. He knew because Harry Markopolos’s boss asked him to reverse engineer Bernie’s trading system and he could not. So obviously Mr. Markopolos was a Wall Street quant looking for a way of returning 20% via methodology trading. Yes you can make 30% some years, but you also can have some draw down years. That will give you a framework of what is practical.
Also that statistic about electronic trading volume is true BUT it is misleading. Most Algos are not trying to trade the market to beat it like we are here, more than half of them are just trying to move money quietly on behalf of big traders. For example if you are a hedge fund, you don’t liquidate a billion dollars in Apple stock with a market order. Trading computers working for your broker run algos that iceberg trade and VWAP trade your order over many days to get the best price and that is all run by electronic trading. Also computers are always trying to balance the market, they might be selling TD Bank stock in Toronto and buying on the NYSE if they find a penny of difference. Even more of them are trying to make some EFTs track the underlying instruments. That kind of trade makes up a big chunk of that program trading. So the computers are not out to get you all the time.
So that is your choices, make prime plus 6% and paddle in the shallows or come join us on the high seas of trading, shooting for triple that return at great emotional, health and educational costs. But yes you can make money.
Use the HFT's -- are they still happening lately? -- to your advantage by waiting patiently for price to hit 'obvious' support/resistance areas, seeing how price reacts to those areas, and then taking a position in the direction of movement there -- break out or return into the range -- with a wide enough stop to not get shaken out too quickly. But you then need to also not scalp out with .1 % of profit on the position. For daytrading, consider using ETF's instead of the futures, to enable smaller positions. Smaller positions are much more manageable.
These smaller positions also allow you to place stops far enough away from these support/resistance areas. Do not die the death of a thousand small losses.
Do some research and you'll discover that the little guy actually has some solid advantages if you're not trying to hit home runs every day.
Would like to thank all of you for your thoughts and insights as they have been very helpful . I am retired now so I need to be cautious with my decision making.
To play in their game of ticks is a hard task for any trader. You make a great point of extending charts to a weekly time frrame as it smooths it out quite a bit and you don't get shaken out as much. I've noticed my daytrading improves when I aim for a few points in the ES (which I trade) rather than ticks which they gobble up in high speed.
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