©Trading Research - www.trading-research.com - January 2016 - Author: Dr.Roberto Ambrogi
I started trading CME futures back in 2002 when the transition from the pit to the screen was still not fully accomplished, but since that time, especially retail traders were already complaining a lot about algo trading, the black box, "the machines" for sudden unexplained movements in the markets and moreover for unwanted losses in their trades.
Someone says that the algo and especially the HFT (High Frequency Trading) represent a big threat to the
daytrader profession, and that the phenomenon has got worse in the last years ...
This thing has never convinced me that much, even when my market knowledge and experience was much lower than I have now.
It's definitely true that with the spreading of HFT and the short term algorithmic trading, some things have changed a bit, eg the order book, bid and ask quantities are almost never reflecting the true intentions, the practice of spoofing (high speed inserting and canceling limit orders) to induce others to make wrong assumptions has been banned but nevertheless it is still a reality, everything is much faster, but, on the other side it is also true that especially in the last few years we can have at affordable price, quality realtime datafeeds and tools (eg. volume profile, delta, footprint, bookmaps etc.. ) that can greatly help us to better read what is actually happening in the markets.
In a "zero sum game" such as futures trading as well as in many other highly competitive environments (eg sports) 95% of competitions are won by 5% of the participants, essentially in a substantial number of competitions the winners are almost always the same ones...
This general rule applies very well in trading where the 5% of partecipants (the best ones) are consistency profitable and the remaining 95% remains in the rear, (these percentages are indicative but have many real evidences); The thing I want to emphasize here is that in each of these two percentages are included all the categories of operators from retail to institutional to algo trading, algos are not all in that 5% elite.
There are some algos that make millions of dollars with consistency, but there are also some others of them who loose may be more with concistency and this all happens on a daily basis, moreover some of them work fine for a certain period of time and then stop working and so on.
The thing is: it is very difficult to make money in the markets with consistency, it is very difficult for everyone, from the retail trader to the institutional trader, from the short term to the medium to the long term, and of course even for the algos...
Even if the available data are not much and also not very clear, (it is objectively difficult to make precise categorizations ... there is no single definition of what can be categorized as HFT and what Algo short-term trading etc ... ) however, credible sources say that especially in the last few years many of the HFT algoritms are "cannibalizing" each other, many HFT firms have closed and their volumes are slowly coming down despite being still a huge slice in the total daily volumes.
But let's see now how this would affect us directly and let's clear some misunderstandings:
Algo Trading: all those orders entered in the market automatically by the machines according to a predefined algorithm with different aims and objectives (market making, efficient execution of large orders, or various other trading strategies).
HFT: it is a type of Algo Trading, which is based on the state of the art technology and low latency infrastuctures, they try to extract profits from the market operating widely below the second, working on the millisecond, without going here into technicalities of how this actually happens.
If we do not trade in this time frame (below the second) and this is impossible without co-location, HFT is not going to affect us in any way or at least very, very little.
With the hardware and the software tools available today even to the retail trader throught volume profile, delta volume, footprint charts, bookmap etc. we are able to see what are doing both the OTF (Other Time Time Frame traders) as well as the HFT traders and in some way also in some cases also take advantage of their activity.
Blaming others (eg HFT) for our trading losses is a clear expression of one of the typical fears of us traders in particular it is the "fear of being wrong".
No one likes to be wrong, it is something that hurts directly on our ego and that's why in the everyday life we constantly hear people attributing to others their mistakes, even very small mistakes; we all like to see ourself favorably, and when we make a mistake that hurts us. In Trading it does happen exactly the same thing.
Marty Swartz one of the greatest traders ever, said that his transition from being consistently losing money to being consistently and strongly profitable occurred when he managed to separate the needs of the ego from that of making money, ie since when he has been able to accept the idea of being able to make mistakes. Before this "transition" admitting a mistake made him more upset than losing money then at some point he began to operate with this new mindset: "By living the philosophy that my winners are always in front of me, it is not painful to take a loss. If I make a mistake, so what !! "
So NO EXCUSES !! our consistency in gains or losses depends entirely on us, we must fully take responsibility for what we do.
In trading we work and we will always work in an "incomplete information" environment, there are no certainties, we constantly deal with probabilities and the fact that sometimes our assumptions will just not work, is the natural course of events and has to be completely accepted and managed at best, only in this way we can pursue our main goal of extracting always more profits from the markets with consistency and over the years.
All we can do is to educate and train ourselves in a complete way from technical to mindset, always doing R&D, understanding always better the financial instruments we trade, managing every situation at best, lots of practice and.... never stop improving!!