The Future of Discretionary Trading?

[Ymir]

Hi everyone,

I was thinking about what the future would be for discretionary traders and if there would be one, in the light of the growing numbers of computerized algorithms at work in the markets. I rather quickly came to the conclusion that I am not smart enough nor nearly have enough knowledge about the respective subjects to make an educated guess, so I thought why not pose the question on the forums to see what perspectives people hold in regards to this question.

I have little doubt computers will become more powerful and made smarter year in year out. And because of this, I believe they will become closer and closer to the human mind, minus it´s known flaws and with more computational power.
I wouldn´t know the time-span for this, it might take another century before they become even close to our human mind, but they might become clearly more effective at trading well before that, indeed, maybe there are already more successful trading programs than trading humans.

So far my thought process it this, all information can be made quantifiable in some way, computers are superior to humans in collecting, analyzing, calculating and projecting this quantified information. Therefore finding all the drivers for a market and quantifying them should result in better trading by computers compared to what humans can do.
However each program will have it´s own influence on the market, bringing change. So change in a market is inescapable, if a market would fully consist of computers trading, change would most likely happen much quicker and arguably more dramatic then if only humans would trade a market. So for computers programs to stay profitable they would have to mainly excel in recognizing changes and acting accordingly to them. This is I believe the bottleneck for them and the main edge of discretionary traders.
But as computers become more adept to recognizing changes and adapting to them themselves, they will start to invade this edge of discretionary traders.

Also, I believe it is much easier for humans to recognize the actions of fellow humans and understanding there psychology, even compiled at mass, then it is to recognizing the actions of computers and there ´motivations´.
As computer trading programs become more and more sophisticated and become a larger part of the market, where does that leave discretionary traders?
They would be hard pressed to phantom the actions of computers let alone exploiting there rational.

Another interesting trend is the financial markets is that they have become increasingly more complex and difficult to trade. This seems a logical consequence of the fact that the civilization as a whole has advanced and more capital is invested into trading the financial markets. But might this trend be reasonably expected to continue, would it then mean that eventually the barrier to entry to become successful in the financial markets will be to high for humans to enter? In the sense that you can only invest so much into the average human mind in the form of knowledge before the returns in financial market results will only increase infinitesimal. And that you would need computers to be able to allocate more capital to results in the financial markets.

I believe around 70% of the volume on the NYSE is from algorithms, which is already quite large and it almost feels like discretionary traders will become an endangered species . Though, I do wonder how much of this 70% is HFT compared to directional or system computer trading.

Curious to know what your standpoint on this is.

 

[new_trader]

I believe around 70% of the volume on the NYSE is from algorithms, which is already quite large and it almost feels like discretionary traders will become an endangered species . Though, I do wonder how much of this 70% is HFT compared to directional or system computer trading.

Curious to know what your standpoint on this is.

Bring it on!

 

[malaguti]

I believe around 70% of the volume on the NYSE is from algorithms

so what? if volume comes from hft algos or drunk investors after an afernoon binge, if the markets going up I buy..does it matter how or what created that movement? Of course not.
If somebody wants to use algos, good luck to them. I'll continue to use LFT and its been working pretty good so far

 

[Ymir]

if the markets going up I buy..does it matter how or what created that movement? Of course not.

I disagree, if you don´t know why the market is going higher, then you don´t know when it will stop going higher and when it will go lower. The whole reason for a trade should be that you know something will happen in the future or at least think it is likely to happen more than 50% of the time.

I assume you are saying that price action alone contains enough information to inform you of the best decision. But is it really realistic to expect we will be able to infer valuable information about where prices will go from the price action that computer trading programs will generate?

 

[malaguti]

if you don´t know why the market is going higher, then you don´t know when it will stop going higher and when it will go lower.

so what you're saying is, if you know who is buying, you'll know how high it will go?
I'm sorry, but thats rubbish.
I'm going to buy some shares on Monday, do you know when I'm going to sell them?
I'm going to buy alot, I mean millions and millions, its going to move that market like its never moved before...does that tell you how far or when it will reverse?

Ymir, we never know, thats the chances we take. i dont what makes the market move today, or tomorrow or who is trading and what they ate for dinner. I know nothing and I don't care either. I didnt know yesterday, and i dont know tomorrow. Does that ignorance stop me from making any money?
No, and I am blissfully ignorant

 

[Ymir]

I have little doubt you are profitable at your trading and you trade without knowing why or even who is trading.

But let´s assume there is one trader in the market and he buys shares because data has come out that shows sales have gone up. Knowing this buyer and knowing his reason for buying, I can reasonably expect he will sell (part) of his stock when indications arise that sales have stagnated or are declining.
Now say I don´t know anything, but I see prices go up, I buy as well, but then unbeknownst to me data comes out that shows sales have declined, this trader now sells his stock, prices drop and I just bought at the height of the move.
This is not a perfect example, nor is it anywhere close to resembling any real financial market, but that is my rationale for why I would like to understand the motivation of other traders.
Of course it is not really realistic to know this about any specific individual in most cases, but the human market participants might be largely focused as a whole on some subject, and it´s doable to find out about it. However in the case of computer programs it will be much harder to know what there collective rationale is.

Maybe I am looking under the wrong stone here, maybe I am missing something you are saying.. but on what basis could humans stay profitable in a theoretical market fully operated by computer systems?

 

[malaguti]

Hi Ymir, im sure its just miscommunication, or you are indeed looking under the wrong stone..answers to yours in red firstly.
Now just because you and I disagree, I'm not trying prove im right or you're wrong. I fundamentally have a different viewpoint to you so we may just have to agree to disagree as they say

But let´s assume there is one trader in the market and he buys shares because data has come out that shows sales have gone up. Knowing this buyer and knowing his reason for buying, I can reasonably expect he will sell (part) of his stock when indications arise that sales have stagnated or are declining.
How conceivable is this Ymir? You will know the buyer? you will know his reasons for buying, and really how likely is it you can expect when this person will sell as well?
You may know 1, you may know 2 but its not one or two people making up the participants, its thousands, millions. Its the collective movement of these 1000, millions that Im trading.
Knowing who you are trading against, or knowing who the participants are is not a sane approach to trading. You say its doable below. but I think you are wrong, its not doable to know the collective reasoning behind millions of participants.

Now say I don´t know anything, but I see prices go up, I buy as well, but then unbeknownst to me data comes out that shows sales have declined, this trader now sells his stock, prices drop and I just bought at the height of the move.
Unbeknownst to you data came out that made him buy. You dont know what single or collective piece of data made that person buy his stock, and you are quite right, unbeknownst to you what single or collective piece of data may make that person sell.
Also remember that this information that made him decide could be represented on a price chart by simply being the collective data points of the last closing price yes? He saw higher highs and that was his rationale..or are you saying that with 70% of algos we will no longer see higher highs?

Of course it is not really realistic to know this about any specific individual in most cases, but the human market participants might be largely focused as a whole on some subject, and it´s doable to find out about it. However in the case of computer programs it will be much harder to know what there collective rationale is.
This is where you and I are disagreeing. haven't algos been around for some time? You say perhaps 70% accounts for the volume. so what %ge made up this weeks trading say? And why should this weeks trading be any different to next weeks?

Maybe I am looking under the wrong stone here, maybe I am missing something you are saying.. but on what basis could humans stay profitable in a theoretical market fully operated by computer systems?
Whoever is moving the market, is leaving a footprint behind him. The footprint comes in the format of a price chart. If the only volume was computer generated that too will leave a footprint.

It might be worth adding that I don't trade off fundamentals, and I don't give diddly for "news" events.

 

[John1]

Hi Ymir, im sure its just miscommunication, or you are indeed looking under the wrong stone..answers to yours in red firstly.
Now just because you and I disagree, I'm not trying prove im right or you're wrong. I fundamentally have a different viewpoint to you so we may just have to agree to disagree as they say



It might be worth adding that I don't trade off fundamentals, and I don't give diddly for "news" events.

Hi Ymir,
I too am not interested in what reasons people might have to buy or sell, just that they do. The right stone to look under is the one that says this is a business so you must treat it like one and all that this implies, trading really is just like any other business. Nobody honest can tell you what the market is going to do next, no matter how much they insist that they can. Therefore you start with business 101, income must exceed cost of doing business. It doesn't matter how this is achieved just that it is. Cost=Risk, therefore the sooner you start to successfully manage your risk the sooner you will realize that it really doesn't matter whether the markets go up down or sideways as you will still make a profit, I am not talking about stop losses here, stops get in the road of becoming truly successful, although if that is all you have then you have to use what you have, I wish you luck. Learn to trade the market/your aggregate position not money or market direction. Learn to engineer your risk management into your overall strategy, utilize all the instruments and their unique characteristics available to you so that a successful outcome can be achieved. I realize it can take time and study, lots of study and then even more study to learn this but you will never look back if you can effectively achieve this, there is no quick way, all the you beaut approaches out there are for mugs. It's a hard slog, don't be fooled into believing it can be done using one technique without pain and effort, or some system somebody tries to sell you, but once you can develop a sound strategy it's money for jam and you should expect to sleep like a baby at least most of the time. :idea:Cheers John1

 

[Ymir]

I guess my view on this was misguided. But assuming a discretionary trader can have a reasonable edge on the market, this would mean he has more insight into what the market is going to do next then the market as a whole. How do you derive this edge from a market dominated by computers?
I can see the reasoning behind having an insight into the collective movement of humans, but it would seem to me, having an insight to what a collective of computers might come up with would be far harder if not impossible given enough diversity.

As for risk, I am starting to think that this might be the golden key to success. I remember many professionaly traders citing it as a cornerstone of there success, but they never really elaborated, so I mostly took a note of it and framed it in the perspective that you should always use stop-losses and risk no more then 1% or so. Meaning it was never fully integrated at all into my trading thoughts.
You are probably the first who is hinting (at least the first hint I am concious of) that there is a whole world of risk-management I don´t know about. And perhaps that trading is nothing more then managing risks in a appropriate way.
Could you give a good source of information to learn more about the topic of risk managment?

 

[John1]

I guess my view on this was misguided. But assuming a discretionary trader can have a reasonable edge on the market, this would mean he has more insight into what the market is going to do next then the market as a whole. How do you derive this edge from a market dominated by computers?
I can see the reasoning behind having an insight into the collective movement of humans, but it would seem to me, having an insight to what a collective of computers might come up with would be far harder if not impossible given enough diversity.

As for risk, I am starting to think that this might be the golden key to success. I remember many professionaly traders citing it as a cornerstone of there success, but they never really elaborated, so I mostly took a note of it and framed it in the perspective that you should always use stop-losses and risk no more then 1% or so. Meaning it was never fully integrated at all into my trading thoughts.
You are probably the first who is hinting (at least the first hint I am concious of) that there is a whole world of risk-management I don´t know about. And perhaps that trading is nothing more then managing risks in a appropriate way.
Could you give a good source of information to learn more about the topic of risk managment?

Hi Ymir,
It is impossible for a trader to know what the market will do next, that's why most fail. Realistically, you have two alternatives,"predict" force your will on the market, you don't have that power,or, "manage risk" this you do have power and control over, although errors will usually be punished harshly as you will be trading large positions. Stop losses are intrinsically linked to prediction and are therefore self defeating, this is not to say that you shouldn't manage your exposure, just that you need to find other methods. Once you have a sound handle on risk it really doesn't matter what trading method you use, you could throw darts to decide and still make money. There is a reason that banks/ hedge funds etc hire the best educated/smartest people and are prepared to pay top dollar, they spend years learning about the various instruments and how to combine them to achieve effective outcomes, this usually results in success. Sometimes though, they can be so smart they even outsmart themselves, think LTCM, and any number of other major institutional collapses over the years. LTCMs main error was not allowing for the extremes that volatility can move to, they nearly brought down the world financial system, others push the edge and start trying to predict, others just plain overtrade which causes their models to fail, the list could go on ad nauseum. lol Cheers John1

 

[new_trader]

Hi Ymir,
It is impossible for a trader to know what the market will do next, that's why most fail.

Maybe.

It isn't a case of 'knowing' though. It is a matter of observing what the market is doing 'now' in order to get an idea of what the next move will most likely be. In my opinion, the reason why most traders fail is because they believe that forecasting the next most likely move is impossible. This is why they endlessly pursue 'stab in the dark' methodologies.

 

[John1]

Maybe.

It isn't a case of 'knowing' though. It is a matter of observing what the market is doing 'now' in order to get an idea of what the next move will most likely be. In my opinion, the reason why most traders fail is because they believe that forecasting the next most likely move is impossible. This is why they endlessly pursue 'stab in the dark' methodologies.

It's all good mate, I'm happy to agree to disagree. It's my opinion that the people endlessly pursuing the next stab in the dark methodologies are the people trying to guess the next move in a market. The only alternative for these people appears to be that they resign themselves to what they have no matter how faulty, doesn't sound like a plan I would ever be interested in following. I operate on the basis that there are known, unknown and unknown unknowns to be dealt with in the markets and I endeavour to keep these in perspective. I would argue that by managing the known, forecasting ( an unknown) is relegated to fine tuning and is of little consequence in the overall success or failure of a trader, but if it works for you all I can say is go for gold. To be honest I have no interest in going to the casino either, it's just who I am, each to their own. Cheers John1

 

[numbertea]

Hi everyone,

I was thinking about what the future would be for discretionary traders and if there would be one, in the light of the growing numbers of computerized algorithms at work in the markets. I rather quickly came to the conclusion that I am not smart enough nor nearly have enough knowledge about the respective subjects to make an educated guess, so I thought why not pose the question on the forums to see what perspectives people hold in regards to this question.

I have little doubt computers will become more powerful and made smarter year in year out. And because of this, I believe they will become closer and closer to the human mind, minus it´s known flaws and with more computational power.
I wouldn´t know the time-span for this, it might take another century before they become even close to our human mind, but they might become clearly more effective at trading well before that, indeed, maybe there are already more successful trading programs than trading humans.

So far my thought process it this, all information can be made quantifiable in some way, computers are superior to humans in collecting, analyzing, calculating and projecting this quantified information. Therefore finding all the drivers for a market and quantifying them should result in better trading by computers compared to what humans can do.
However each program will have it´s own influence on the market, bringing change. So change in a market is inescapable, if a market would fully consist of computers trading, change would most likely happen much quicker and arguably more dramatic then if only humans would trade a market. So for computers programs to stay profitable they would have to mainly excel in recognizing changes and acting accordingly to them. This is I believe the bottleneck for them and the main edge of discretionary traders.
But as computers become more adept to recognizing changes and adapting to them themselves, they will start to invade this edge of discretionary traders.

Also, I believe it is much easier for humans to recognize the actions of fellow humans and understanding there psychology, even compiled at mass, then it is to recognizing the actions of computers and there ´motivations´.
As computer trading programs become more and more sophisticated and become a larger part of the market, where does that leave discretionary traders?
They would be hard pressed to phantom the actions of computers let alone exploiting there rational.

Another interesting trend is the financial markets is that they have become increasingly more complex and difficult to trade. This seems a logical consequence of the fact that the civilization as a whole has advanced and more capital is invested into trading the financial markets. But might this trend be reasonably expected to continue, would it then mean that eventually the barrier to entry to become successful in the financial markets will be to high for humans to enter? In the sense that you can only invest so much into the average human mind in the form of knowledge before the returns in financial market results will only increase infinitesimal. And that you would need computers to be able to allocate more capital to results in the financial markets.

I believe around 70% of the volume on the NYSE is from algorithms, which is already quite large and it almost feels like discretionary traders will become an endangered species . Though, I do wonder how much of this 70% is HFT compared to directional or system computer trading.

Curious to know what your standpoint on this is.

Interesting idea that computers will inherit the trading world. I can imagine one company pitted against another in the end, who's p-n junction will burn up first in that final mistake!?!

Truth is that for a computer to be truly traded the programming would have to be unbelievably well done. Programming out there just isn't that good and the programmers are human, putting their psychology unwittingly into their programs. My trading is now fully automated but it is my trading just put into a repeatable form that, hopefully, won't make stupid emotional mistakes like I do when I am trading. A programmer might program for 30 years give of take before retiring but mostly the development will end with the lead programmer, a new vision will then be taken up by the next person. Humanity will dictate automated trading. Not the other way around.

Cheers

 

[John1]

Interesting idea that computers will inherit the trading world. I can imagine one company pitted against another in the end, who's p-n junction will burn up first in that final mistake!?!

Truth is that for a computer to be truly traded the programming would have to be unbelievably well done. Programming out there just isn't that good and the programmers are human, putting their psychology unwittingly into their programs. My trading is now fully automated but it is my trading just put into a repeatable form that, hopefully, won't make stupid emotional mistakes like I do when I am trading. A programmer might program for 30 years give of take before retiring but mostly the development will end with the lead programmer, a new vision will then be taken up by the next person. Humanity will dictate automated trading. Not the other way around. I would be interested to see the proof that it is harder to trade now than it was in past eras, granted things might be faster/more complex but we also have the tools and knowledge available to manage this effectively. Although I would suggest the you might very well be flogging a dead horse in the TA/Charting arena.

Cheers[/QUOTE

Once again in hot pursuit of that elusive system. lol One of my brokers was a Local on the SFE before it went to screens back in the late 90s, if the answer was simply a few charts and indicators then he would probably still be trading, what you can't program into a computer is creative lateral thinking, instinct/emotion and decission making around polar/conflicting information, these require value judgements often based on vastly different circumstances at different times, markets are constantly evolving. There will always be a place for discretionary traders, they will simply be taking advantage of the inherent flaws exhibited by computer systems. I would be interested to see the proof that it is harder to trade now than it was in past eras, granted it might be more faster/complex but we also have the tools and knowledge available to manage this effectively. Although I would suggest that you might very well be flogging a dead horse in the TA/Charting arena for the reasons above, 100 years ago inderviduals would have drawn up their charts specific to their needs and I can see where there might have been an advantage at that time, now though, think buggy whip manufacturer in the modern age. Cheers John1

 

[PenchantForPips]

I think there may be an overemphasis on what changes are occurring because of bots in the market place. The first question is one of processing power and intelligence. How intelligent will machines become? I think there may be a misconception in the relation between processing power and intelligence. Though the former and later are indeed connected and even, perhaps commensurate, they are not necessarily the same thing. But, I feel that is more of a philosophical question. The primary concern is the affect of machines on trading. HFT bots are already changing the way markets are traded and have had impact markets. There have been situations in which the markets have taken significant dives only to recover in a span of time that is finer than human reaction time. This activity, however, will be smoothed out as machines become smarter because the weapons available become more democratized. Imagine a soldier equipped with an M-16 during the Civil War, there would have been a significant advantage to that individual. However, if machine guns are ubiquitous the advantage disappears (though the level of carnage does not attenuate). The fundamental things that move the markets won't change. Algos don't change what moves markets, the technical and fundamental forces that move markets are fixed. What they will do is change the way those assets are traded and the time frames involved. Traders may have to employ more adaptive trading methods and utilize more sophisticated tools but there will always be opportunities to profit in the markets.

 

[marcela 2020]

Investment method that can lead to good results, but this great freedom to act requires personal qualities to have a mind and psychology that allows you to follow a strategy without being influenced by harmful emotions

 

[Trader H.C.]

You're right, for super short term trading & low timeframes, algo can always act faster than humans. It'll only get worse in the future.

For retail traders, their best chance to win is to trade on higher timeframes, because the impact of algo orders is limited and the price action there was agreed by many more buyers and sellers, which makes your trading signals more accurate.

 

[TickCOM]

The future of discretionary trading hasnt changed that much - sure it is today more difficult due to markets are getting less predictable, but compensated with much more sophistcated trading tools are available today.

Still the main problem of discretionary trading is the waiting time, profitable traders talk constantly about how boring its is to daytrade.

One would seek to solve the problem of getting alerted on trading setups, and how to let the trade play out without beeing there 6 hours. Without tools which can alert you on promising trading setups, and which can monitor the open position for you - better to go the full automated way, or simply do something else than trading.

The obersvant trader would conclude this involes a need to implement your trading idea in a method which can alert you.