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I Feel You
The more I trade, the more I am convinced that the cowboy-seat-of-the-pants-discretionary style of trading is done. Algos are the future, although not necessarily in the way you think. Pure algorithmic trading is actually starting to lose its value. Everywhere you look -- in equities, in FX, in futures -- algos as percentage of volume are peaking. That’s because we’ve pretty much reached the limits of front running. Most black box algos are nothing but brute strength machines that simply cheat the average investor by scooping up the order a millisecond ahead. Now that machines are fighting each other, margins have collapsed and HFT is no longer as lucrative as it once was.
However, there is a new class of software called “grey boxes” that are actually producing real value in the market. “Grey boxes” act a decision support software tools for traders. By taking an objective measurement of the market, they provide traders with valuable insight, anchoring discretionary decisions with solid quantitative support. Just like card counting at blackjack -- they help traders to put the probabilities on their side. That doesn’t mean they always produce winning trades. Just ask any card counter about “bad beats”. Having higher probability simply means that over a long period of time you stand a better chance of winning. In the immediate present you could still suffer massive losses -- and this doubly true in an open ended game like the financial markets where are odds are constantly shifting versus card games like blackjack and poker where the number of possibilities is fixed.
Still although “grey boxes” may be the next wave of trading, I still firmly believe you need to allocate a small part of your capital to purely discretionary trading. You should do this not because it will make you money -- in fact its very likely you’ll lose -- but rather because it will help you understand the price patterns of the market. As human beings we are highly tactile creatures and by actually “feeling” the market you get to discover new ideas, new patterns, new behaviors that a regimented computer program will never pick up.
So in the end, I believe success in trading lies in both computer assisted decisions and good ole human speculation.