Strategies with edge for retail traders?

[options-george]

(Apologies in advance if this considered a dumb question!)

Are there any trading strategies that work specifically well for retail traders?

For example, picture a trader sitting on the trading floor at UBS saying "Gee if only I was trading my own money from home - I would pick off this and I would pick off that. It would be easy. But I simply can't do with the big position sizes that I am forced to take for the bank"

I am not asking people to share what the strategies are, if they indeed exist.

But more a nod-of-the-head saying "Yes, you are on the right track. Just keeping looking for it and working away at it".

Thanks in advance for sharing your comments.

 

[tomorton]

I think this is a good question. The most I've ever heard or read about the approaches that only retail traders can use are that we can get in and out of a position very fast, and rarely face liquidity issues. But nothing re specific strategies. I hope we do learn more here.

 

[tar]

Scalping stocks ...

 

[paszkman]

not being forced to trade..

 

[drtro]

No matter what strategy you choose, it'll always end up in the 40-60% success rate long term. Unless you're scalping, but there's no real edge in that. Success comes from risk management, not some strategy or Mark Douglas psychology sheeple.

 

[darktone]

No matter what strategy you choose, it'll always end up in the 40-60% success rate long term. Unless you're scalping, but there's no real edge in that. Success comes from risk management, not some strategy or Mark Douglas psychology sheeple.

Are you saying that psychology doesnt have much to do with winning in the game that is trading?

 

[options-george]

No matter what strategy you choose, it'll always end up in the 40-60% success rate long term. Unless you're scalping, but there's no real edge in that. Success comes from risk management, not some strategy or Mark Douglas psychology sheeple.

Do you mean that the win-rate of long-term profitable strategies tends to be in the range of 40-60%?

 

[jsc]

Buy and hold

 

[Warren534]

Selling 1 SD option strangles with high IVR. Strong statistical edge, as IV is overstated.

 

[options-george]

Selling 1 SD option strangles with high IVR. Strong statistical edge, as IV is overstated.

Thanks for your comment Warren.

Do you consider that the edge is good enough to overcome the associated transaction costs?

 

[Warren534]

Thanks for your comment Warren.

Do you consider that the edge is good enough to overcome the associated transaction costs?

Absolutely. Detailed studies indicate about 84% probability of profit, while mathematically it should be about 68%. This is a huge edge. Transaction costs should be less than 1 tick.

 

[NVP]

not being forced to trade..

100% true........retail traders have to use every bit of advantage they have .....

N

 

[options-george]

bump!

Coincidentally I took a quick browse through one of the books on the shelf in our trading office. It's "Quantitative Trading" by Ernest P Chan. His books includes a chapter entitled "Can Independent Traders Succeed?" with the gist of the question being whether they are able to compete with large professional traders.

I thought this would be useful to share here.

His answer is a solid yes, with his reasons being, in summary:
- "Capacity" - there are often situations that can be exploited with a smaller level of capital but not with a large amount of capital. Thus the independent trader should have a lot more opportunities. Another way to look at it is to say it's easier to make 20% on $100k, then it is to make 20% on $100m. IMHO, an example would be trading strategies revolving around exploiting round numbers in FX.
- Intense competition among hedge funds trying to exploit the same edge, regularly leads traders to over-leverage, and potentially cause a market meltdown if everyone then tries to exit at the same time. Retailers don't have this pressure to compete or over-leverage.
- Retailers do not have constraints imposed by management as to what instruments they should trade and/or how they should trade them. Retailers have more freedom in other words. They are generally free to trade their view, which professional sometimes are not. (my own 2p here would be to say that the increased regulation since 2007/2008 has created further additional restraints on professional traders [which has reduced the amount of prop trading done by banks] - again something not applicable to retailers)
- Influence from management in wanting to allocate loads of capital to a strategy as soon as a strategy shows promise, and wanting to cut funds as soon as there is a drawdown, instead of simply rigidly sticking to original money management parameters (I guess in this context the trader has to battle with the emotions experienced by his non-trading managers)
- High risk appetite for professional traders because they are not trading their own money. Unlimited upside in terms of share of trading profits, limited downside (because they are not sharing in the losses) - this has a negative impact on their trading activity in that most likely they are adopting more risk than the retailer who is trading his/her own funds.

Btw, I thought it was a good practical book on how to go about building a full-time or part-time trading business. Written in 2009.

 

[options-george]

bump....

I wanted to share some additional thoughts on this topic.

During Sep/Oct/Nov/Dec I spent significant amounts of time working with a well-qualified programmer in attempting to develop an automated trading strategy for two futures markets. I also had the luck to sit down with a systems trader at a hedge fund in the City who talked me through his strategy development and managing the shelf-life of existing strategies. The latter was quite an eye-opener.

From these experiences I now consider the following:
- A human/retail trader can pay attention to a huge number of variables. Many of these variables, and particular the combination thereof, can be very difficult to incorporate in an automated strategy (according to the trader and according to the fund's owner).
Sure an automated strategy has the advantage of always executing and managing perfectly in line with the strategy spec, but it is probably quite restricted with the amount of parameters that it can reasonably take into account.
In contrast a retail/human trader, over time with a lot of practice, learns to quickly combine a large range of factors in his brain and gets himself into the correct trading setups. This actually constitutes 'edge'.
- I now question the merit of retail traders pursuing automated strategies - because larger players in the markets have far far superior testing technology, skill base, experience, execution technology and bankroll - if there was an edge that could be found (for however long) with some backtesting performed in MT4, Matlab, Excel or TradeStation, then hedge funds like my colleague's one, would not bother needing to exist. They are looking for the same strategies that retail traders attempt to pursue. Realistically, who has the better chance here?
- Therefore I am thinking retail traders should probably stick to strategies encompassing aspects that do not lend themselves to programming - e.g. the use of technical patterns, news (pre- & post-), instrument correlations, fundamental considerations. There the level of the playing field is more supportive, though the retail trader still has to battle with his psychology and discipline.

Just some thoughts - would be great to hear what others think of these suggestions.

 

[ffsear]

Patience is the retail traders edge

 

[options-george]

Bump.

Some further thoughts on advantages that retail traders have in the markets:

- Retail traders can pretty much trade any idea they can think of (such as chasing 10 pips!), without moving the market, because the volumes they trade in are likely to be insignificant.
- As opposed to professional traders (regardless whether they are working for a small fund or a large institution), they have no pressure to put on a minimum number of trades, meaning they can be selective and take only the best setups
- nor the requirement/pressure to trade a specific strategy, nor a specific instrument.

 

[tomorton]

All correct.

These and similar distinctions between retail and institutional trading should mean that us retail traders should be spared inane comparisons with what fund managers do and don't do and how few of them can beat the market and how great their research teams and computers have to be and how you need at least £70mill to trade effectively. And blah blah blah.

 

[HobbyTrader]

Waiting for the right moment to buy into a stock. The GFC was a great opportunity to buy some stocks I thought were now good value.

 

[foroom lluzers]

(Apologies in advance if this considered a dumb question!)

Are there any trading strategies that work specifically well for retail traders?

For example, picture a trader sitting on the trading floor at UBS saying "Gee if only I was trading my own money from home - I would pick off this and I would pick off that. It would be easy. But I simply can't do with the big position sizes that I am forced to take for the bank"

I am not asking people to share what the strategies are, if they indeed exist.

But more a nod-of-the-head saying "Yes, you are on the right track. Just keeping looking for it and working away at it".

Thanks in advance for sharing your comments.

use high probability technical strategies , and trade options on them , in place of futures.

http://www.trade2win.com/boards/tra...gh-probability-trend-trading.html#post2901996

 

[WklyOptions]

Bump.

Some further thoughts on advantages that retail traders have in the markets:

- Retail traders can pretty much trade any idea they can think of (such as chasing 10 pips!), without moving the market, because the volumes they trade in are likely to be insignificant.
- As opposed to professional traders (regardless whether they are working for a small fund or a large institution), they have no pressure to put on a minimum number of trades, meaning they can be selective and take only the best setups
- nor the requirement/pressure to trade a specific strategy, nor a specific instrument.

Hi, options-gorge,

Hope you have been doing well. Enjoyed your many posts in T2W.

One quick point to your 2nd bullet item: "meaning they can be selective and take only the best setups"

This is not a high likelihood for the average retail trader - simply b/c the avg retail trader does not know how, and/or does not care to, validate rigorous back-test(s) of the so=called "best setups" as identified/believed by that trader.

High performance - consistent high performance - is built upon conditioned systematic daily metrics of both Trader and system performance criteria. And once this DISCIPLINE and structure is established - it still takes lag time (in years) in order for the small daily gains of SKILL to accumulate and develop into high proficiency and mastery (as true in any sports and/or competitive endeavors at the highest levels).

WklyOptions