Algorithmic trading – How can you compete in the Stock market

Here is a fact to meditate on – today just under 75% of all equity trades are done with computer programs. For me that is amazing. You will be outgunned by the big traders before you even your stock chart page loads in your browser.

If you are looking at investment strategies that try to take advantage of arbitrage or quick turns in the market, be aware there are traders out there who use supercomputers with streams of data that flow so fast no human could process this. There is a good chance as a small trader sitting at home you will get burned. I have been. The question is how can a small guy go up against these super computers with algorithms that execute trades in milliseconds and flash trade? The answer is easy, do not play their game.

calculator for trading
How can you make money in stocks with basic methods, when the other guys are using super computer and high frequency trading strategies?

Take inspiration from my investment metaphors from pop culture

Morpheus: How did I beat you?

Neo: You… you’re too fast.

Morpheus: Do you believe that my being stronger or faster has anything to do with my muscles in this place? Do you think that’s air you’re breathing now?

Computers will never be what you are because they live in a world of rules and boundaries.

Here is another metaphor –  I remember an episode of the TV show the Highlander, where Duncan McCloud the main star was up against a master swordsman. In a one on one dual there was no way the Highlander could win because his opponent was two steps ahead of him as be had trained for centuries. Yet in the end he did win. How? He did not play his game, he tried something very unconventional. If you learn to zig when everyone else zags you can win.

Being unconventional does not means taking crazy risk or doing something random

I do not recommend random or risky in stock trading as in my experience mavericks usually get burned. The reason a particular strategy is not played in the market is it has been tested and proven not optimal.

Gary Kasparov also makes this same observation. Often players will attack him with unconventional lines, but they are risky and ineffective. They have been abandoned as strategies and do not work in practice. Hence not every unconventional stock trading strategy is good.

So again can you beat the flash trading experts who use super computers and quantitative models?

Think about Pareto principle if 80% or 90% of equtiy trades are driven by computer black box trading, where buys and sells are executed without human intervention, the system will start to degenerate. As models will try to out guess then next model in the short-term it will become zero sum.

How to be a trader – First high frequency trading tends to be short-term. You have to play long-term investment strategies. In my opinion that is the answer. That is why I look at the 12 month moving average for example. You have to emphasis strategy over HFT tactics. You have to explore and tap into your brain power like in the film ‘Limitless’. But first start with good base: Here are two methods.

  1. Questionably effective is computer trading – You can buy computer trading software, but still the big traders will have an advantage in terms of time of trade execution (miliseconds), on you in most cases. Better is to play a different game. Invest for the longer term, and if you find a strategy that really works, your gains can be amplified, see point two below.
  2. This is Effective for me – Quantitative investing – use a tested and academic investment screener. Let the Einsteins narrow the playing field for you based on sophisticated models, and from this group of stocks make selections using your own judgement based on the greatest super computer in the world, your brain.

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One response to “Algorithmic trading – How can you compete in the Stock market”

  1. Chris

    You are spot on, you can’t compete against the hedge funds with their super fast computers, best strategy for most people is a quantitative stockscreen system that has been tested over the long-term.

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