Will the Algo-firms and the billion Dollar High-Frequency Trading (HFT) models soon take over the financial markets and make human traders obsolete? If you are a trader, you have probably asked yourself this question before. HFT and computer based trading is the new, omnipresent “threat” which traders believe is turning trading into an uneven competition. But, is it true? How is HFT really impacting the financial markets and is there still room for human traders, trading discretionary trading strategies?
Computers are a natural evolution
First, it is important to understand that computers and HFT is a natural evolution of how market participants interact. Back in the days, there were no real-time charts and people had to trade based on the outdated information they got from the newspaper. The people who had access to real-time market information had a huge advantage over the normal traders. Then, with the invention of the telephone, people who had access to a phone were able to get price information and place trades much faster again. Eventually, when a few people had the possibility to use a computer to watch markets in real time and place trades by a mouse-click, everything changed and their advantage over the average trader was huge once more.
Throughout history, trading profitably wasn’t only something for the privileged ones who had access to the newest technology. Even if some traders seemed to have a significant disadvantage, it didn’t mean that there were no profit opportunities and we will show you why.
The complexity of trading
The fact that a computer program beat a human chess player does not translate to the world of trading and financial markets, although it’s a comparison people often draw. First, in chess you only have one opponent and the goal is to beat this one opponent only. Second, chess is a rule-based game with a limited amount of choices and possible events. These characteristics allow computer programs to accurately calculate the best possible move at any given time; and computers are much better equipped to calculate the potential moves 10, 20 or even 30 moves in advance. In chess, your opponent is limited to a few moves and there is nothing he can do to surprise you by doing something unexpected; the complexity of trading does not compare to this.
At any given time, anything could happen in the world of financial markets and the influencing factors are limitless. Governments, central banks, political and geo-political events, individual economies around the world, and, maybe most important of all, the unpredictable human component is what contributes to the complexity of trading and financial markets.
There may be computer programs which are continuously making incredible amounts of money, but, by no means, are they able to accurately predict the future of price moves. It is more likely that they are just more efficient at executing trades, making use of speed advantages and play the odds in a way which humans often can’t because of their emotional nature.
Algo trading is a niche
As we have just said, the main advantage of computer and HFT lies in their ability to avoid emotions and to execute trades within milliseconds based on a set of rules which they will never break. And, without a doubt, if humans were trying to beat HFT by engaging in the same field, there were hopelessly lost. The existence of algorithmic-based trading models might have changed the way short-term price movements manifest on your charts and HFT may even be the reason why short-term trading and scalping is ‘harder’ (better say different), these days.
But, as mentioned earlier, HFT is just the next step in the evolution of trading and trading technology. Thus, traders have to acknowledge that the nature of the financial markets and how they have to interact in the markets has to evolve with it. Stubbornness and ignorance are fatal in trading. If HFT is changing the landscape of trading, it is a trader’s responsibility to change with it. Instead of trying to compete with HFT programs on the tick-based or very low time-frame charts and trying to scalp of a few ticks here and there ,maybe it’s time to move to the higher time-frames where the impacts of HFT is less significant, if you see your competitive trading edge diminishing.
Adaptation and excuses
Ed Seykota has probably said it best:
“The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.”
After all what we have said, it is time to perform an honest self-evaluation; self-awareness is an essential character trait of every successful trader. Should you really blame the existence of HFT and Algo-trading, or is it more likely that your trading approach and mindset are not as professional and serious as they should be? Are you putting in enough work and are you continuously working on your skills as a trader to develop and improve your competitive edge? Looking for excuses for trading failure is the reason why so many traders are struggling on a day to day basis. You can’t change the markets, but it is not necessary either. Work on yourself first; you are your greatest enemy as a trader.
Futures Trading involves a substantial risk of loss. Past performance is not indicative of futures results.
