A lot of excellent responses here, so I'll just add to some of the themes already mentioned. It is my opinion that to be a viable opponent in the markets, traders will have to rely on the abilities that make human beings superior to computers. We all know that the human brain cannot compete against a computer when it comes to routine, raw number-crunching, analytical, information-based tasks (i.e., purely left-brained abilities), and this applies to trading strategies that can be programmed and automated. We currently live in an information age where there is an abundance of information and incredibly fast computers. This sets the stage for efficient automation. Computers are significantly faster, they can process vast amounts of information in significantly less time than humans, they don't get tired like people do, and they don't make errors. Generally speaking, if you are an individual trader with a trading strategy that can be described in a finite number of steps, a computer will be able to trade it more easily and better than you. I agree with ItalianSharp when (s)he wrote:
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Big institutions use highly sophisticated automated programs for their trading; they have the best and fastest connections to the markets; they have the best trading platforms. All this makes it nearly impossible for a private trader to compete with them on the same ground. Basically, if you go for the automated stuff, you'll always be one step behind the institutionals. |
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So in my opinion, very few automated, systems traders will be able to compete with institutions that have the best minds, deepest pockets, fastest computers, best automated trading systems; in short, the best, and most abundant, resources. So what type of trader do I think will be able to compete with the institutions? Discretionary Traders. Specifically, traders that combine the analytical, problem-solving skills found in the left hemisphere of the brain with the human abilities carried out by the right-side of the brain. These right-brain abilities include seeing relationships and integrating those relationships into the big picture, pattern recognition, focusing on context, creatively combining ideas, understanding what your competitors are doing and how they may be feeling, and looking at the markets in new and different ways. The list goes on, but these are all examples of areas where human beings excel over computers and the focus of most discretionary traders, I think. Traders that use a holistic approach, combining left and right brain abilities, will be able to continue to compete in the financial markets against institutions with vast computing resources. Anyway, this is my current belief which has shaped my trading style and methodology.
Soultrader, I think you started a thread on an important topic that will be discussed heavily by many traders as time goes on. I believe it's important to consider how we plan to adapt in a world that's becoming more and more automated.
Recommendation: Read "A Whole New Mind" by Daniel Pink, an easy, enlightening read that discusses this subject in more detail. Dogpile mentioned this book in one of his posts.