The Perfect Time Frame for the Retail Trader

Boris Schlossberg

I’ve been running a variety of my algos, both for the BK chat room and for my own account and the longer I trade the variations the more it becomes evident that the one hour chart is the perfect frame for the retail trader.

There are two principal reasons for this. The one hour is responsive the daily swing flows of the market while at the same time long enough to avoid the random ebb and flow of intraday prices. As retail traders, we simply can’t compete on the sub pip level of market makers and HFT algos. It’s akin to driving the Autobahn in a Chevy Cruze. No matter how hard you try you will never be able to drive against the BMWs, the Audis, the Mercedes’ and the Porsches.

It is fun to try, however, which is why we all gravitate to the 1-minute or the 5-minute chart. But the spread, the commission, the market volatility create an almost impossible execution environment and that’s why we should allocate most of our capital to the longer time frames (say in a 70/30 split) in order to truly optimize the chance of success.

The 1-hour chart is no panacea and certainly won’t guarantee success and is not even immune from news bombs which could flip sentiment in an instant and wipe out perfectly good trades. Still, it is slow enough to catch most of the more meaningful market signals and it allows for larger stops and limits which by their very essence protect you from the randomness of the lower level charts.

Yet even on lower level charts, the algos have taught me that less is more.

There is nothing quite like attaching a new EA on 12 or more pairs and seeing it trigger a multitude of trades on 1 minute and 5 minutes charts. It’s exciting! It’s fun! It’s action packed! But very soon you see one, two, three trades go sour all once and then it’s no longer enjoyable. The profits of the past few hours begin to melt away and then quickly turn to losses and then to truly bad losses, especially if you are trading your regular size. Very quickly you realize that you can’t trade a lot and win. You are not a market maker with infinite capital, split-second execution and access to near choice spreads. You are price taker like it or not and that means you need to choose carefully.

That’s actually one of the great advantages of trading retail. Unlike market makers and HFT algos, you are not compelled to trade. You can step away anytime you want -- that’s a huge edge that most retail traders overlook because they just want to be in a game. But an algo, even a very good one quickly shows you the folly of your ways.

On my 1-minute chart, I’ve winnowed myself down to just three pairs and 5 most liquid hours of market trade. That means I may only do 2-4 trades per day. And that’s enough. In fact ideal. The more you trade, the more you lose -- it’s the everlasting truth of the markets but algos help you discover it, mighty quickly.

In FX -Pro Traders are Dying, Retail Traders Rising

Boris Schlossberg

At the beginning of last week, Bloomberg ran a long story mourning the demise of the bank FX trader. “Take the pay cut, “ warned one veteran darkly. “Oh, and don’t wait for the phone to ring.”

The computers have taken over. The algos now do most of the market making and HFT firms like Virtu dominate flow whittling margins to a tenth of pip. Long gone are the days when you could take your mates for a beer and get preferential treatment on client flow. Or better yet when you could simply markup deals 20 pips or more for “non market” sensitive customers like corporates, pension funds and equity mutual funds. It was a great party while lasted, built on insider info, expense accounts and very little economic value.

Dealing FX still remains a cheaters game. Banks continue to pay their multi billion dollar fines for rate fixing and proceed in their tricks and treats. But the party is clearly coming to an end. Customers are much smarter, everyone has access to price information and competition has become fierce. FX will never be a totally clean market until it goes on exchange but it’s good enough at this point so that retail traders can play the game on mostly level playing field.

And therein lies the irony. The very same technology that is killing the pro trader is enabling the retail trader to compete effectively in that most unforgiving of arenas -- the FX day trading market. Right now as I sit and type this, I am looking at nine screens that give me the following services all for free:

Streaming dealable quotes as tight at 1/10th of a pip on euro and yen and 1/2 pip on cable. Just a few years ago I was paying as much as 5 pips spread for GBP/USD and now that’s often my profit on a trade.

Live Squawk box out of London that keeps me up to date on all the breaking macro and central bank news, so I can react quickly to any potential action.

An RSS feed from my buddies at ForexLive that gives me color on the market 7 days a week.

Charts, Charts, Charts -- you name it you can have it and all for either free or a few bucks per month.

A Live News Applet that gives me eco data as quickly as a Bloomberg terminal

MT4 -- my very own algo machine that lets me manage my trade inventory at the speed of light and takes all the sloppy trade entry/logic out of my fumbling hands.

Last but certainly not least -- Slack. The greatest software of the 21st century that allows me to trade in a chat room with traders from all over the world 24 hours a day 5 days a week. All of our trades are instantly uploaded into the room and we can discuss, analyse and get inspiration from each other -- just like a dealing floor but only better.

So as I observe the market changes over the past decade, I can honestly say -- it’s only getting better.

Why Google Cars are the Future of Retail Trading

Boris Schlossberg Uncategorized

This week the New Yorker has a long essay on the the history and development of driverless cars. The writer spent months with Google engineers and various auto industry executives and the piece makes for a fascinating read. Although you walk away amazed at the power of the technology, the central thesis of the story is not that driverless cars are simply the next innovation in luxury, but rather that they are the next quantum leap in safety.

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Contrary to our intuition and grandiose sense of self worth, the computer is actually a much better driver than 99.99% of the general public. It doesn’t veer, it doesn’t fall asleep, it doesn’t drink, it doesn’t get bored and it doesn’t spill coffee all over its pants. In fact if public safety was the only factor, it would behoove us to legislate that all driving must be driverless by the next decade.

The driverless car is simply the next step in the integration of machines into our daily life. It is only jarring to our sense of self worth because it replaces a key activity that most of us perform every day. Yet if you think about it machines already correct our actions on daily basis in many spheres of life.

For example I am 50 years old and I still to this day cannot accurately spell the word “tomorrow”. Indeed I can barely spell every third word I type, but with google autocorrect no one is the wiser and instead of looking like the writings of a 10 year old with ADD, my research is quoted daily across the globe.

Certainly you can make the case that but ignoring the spelling conventions of the English language I am a lazy good for nothing slacker that should spend a semester in a high school remedial grammar class. But the truth of the matter is that few us can attain a Spartan sense of discipline, but many of us can achieve near Platonic levels of wisdom with the aid of technology.

Which brings me to trading. The world of retail trading is changing rapidly as algorithms continue to dominate flows in almost every market. When it comes to FX, the MT4 platform is the overwhelming choice for automated trading for the vast majority of retail clients. And there is a good reason for that. The MT4 allows you to program many repetitive, tiresome tasks that are often the difference between winning and losing.

Indeed according to some industry literature MT4 traders have a lifespan that is 5 times as long as point and click manual traders and they tend to perform up to 6 times better than screen based traders. None of this should be a surprise. The two main reasons why algo accounts do so much better is because computers don’t pull stops and they don’t add to losing trades. Indeed ever since I’ve moved all my trading to algorithms I haven’t blow up a single account. That certainly doesn’t mean I haven’t had losses, but in each every case the losses have been contained to the parameters of my trading plan -- and isn’t that progress enough?