Death of Discretionary Traders??

[Soultrader]

Ive been spending the past 2 months going to various trading firms for interviews on a prop trading position. What I have learned is that pure discretionary traders are a rare breed. Most institutional trading is automated using statistical strategies, arbitrage, hedging, etc... (im still unfamiliar with all the different styles they have)

It seems as if technical trading frightens management because they have no clue what traders are actually doing. Hence, they prefer to train traders who come from a more mathematical background.

My question is this. Should discretionary traders be worried about the future of trading? Can discretionary retail traders compete with insitutions that pump millions designing automated systems, high tech platforms, top notch data feeds, etc... ?

It seems like traders can now profit through advanced systems without actually knowing how to trade. (without knowing technicals, trader psychology, etc..) Do we even need traders? In the near future, are we likely to see more systems and less traders?

[notouch]

For very short term traders it's difficult to find an edge against automated systems run by investment banks. I can't see how anyone could trade with a 10 or 20 point stop when it could just be triggered by a program. If you look at daily charts, on the other hand, they have exactly the same patterns that they had 20 years ago so nothing's changed. The same is probably true of hourly charts. I know currency traders in investment banks who trade using 4 hour moving average crossovers.

Also only a minority of trading activity is speculative. The recent move in treasuries, for example, was due to hedging and most forex volume is commercial in nature. A high percentage of stock trading is by mutual funds buying on behalf of the public. There are plenty of opportunities as long as you don't decide to compete against arbitrageurs and programs.

[Soultrader]

Thank you notouch. Some excellent points you bring. Very interesting how you mention that only a minority of trading activity is speculative. The reason I say this is because in my opinion, any type of trading is speculative in nature. Including commercial activity, hedging, arbitrage, etc.. Traders are all placing a bet to extract money. Maybe someone can add some better input for me.

Another thought that came up... can we expect to see a more trending market if more traders become automated? All the chop and noise is created by a battle of emotions imo. Or perhaps a 1minute chart will start to appear like a 3min, a 5min like a 15min, etc..?

[notouch]

I don't agree that any type of trading is speculative. Hedgers want to lock in profits by taking away the risk of price fluctuations. A corn farmer, for example, makes his money from selling corn and will enter the futures market to lock in profits of the corn he harvests. A Japanese exporter is an even clearer example. He has made profits by selling DVD players to Europe and now needs to change his Euros into Yen. He doesn't care what the exchange rate is, he simply needs to convert the money in time for end of quarter accounts.

[torero]

One thing we can be sure of is that with more automation, the possibility of time of day will be crucial. Say right on the dot at 2pm, you may notice a burst of volume. On the hour seems to be auto systems going off. I do believe that scalping and extreme short-term trading is very difficult against computerized trading, especially news trading in forex.

I think trends may happen but in bursts because as soon as a system becomes profitable, the market assimilates it and make it stop becoming profitable so there's constant optimizing and re-optimizing and new strategy out in the market.

It's true the patterns still exist even after the players have changed.

[notouch]

I think the short term charts will become more volatile, not more trend friendly, as one automated system triggers another sending prices fluctuating up and down. The longer term charts, on the other hand, will still reflect the positions of the same old long term players so will look the same as ever.

[TinGull]

	Quote:	torero
	the market assimilates it and make it stop becoming profitable so there's constant optimizing and re-optimizing and new strategy out in the market.

Exactly. There is always going to be a human mind behind any system. Wherever there's a human mind, there's always room for error, and where there's room for error, there's room for a discretionary trader to make money. There will always be a market for the discretionary trader. Greater volatility brings greater profits for the day trader, IMO.

[MrPaul]

	Quote:	Soultrader
	Ive been spending the past 2 months going to various trading firms for interviews on a prop trading position. What I have learned is that pure discretionary traders are a rare breed. Most institutional trading is automated using statistical strategies, arbitrage, hedging, etc... (im still unfamiliar with all the different styles they have) It seems as if technical trading frightens management because they have no clue what traders are actually doing. Hence, they prefer to train traders who come from a more mathematical background. My question is this. Should discretionary traders be worried about the future of trading? Can discretionary retail traders compete with insitutions that pump millions designing automated systems, high tech platforms, top notch data feeds, etc... ? It seems like traders can now profit through advanced systems without actually knowing how to trade. (without knowing technicals, trader psychology, etc..) Do we even need traders? In the near future, are we likely to see more systems and less traders?

Hmm, well I had written out a long winded post about the evolution of markets and my personal feelings about the future of professional speculation but I think I'd rather just sum it it because I'm sure most of you like me hate 3 page post responses.

In short I do not feel that the future of discretionary trading is in danger, the two things that never change, no matter who (or what) is behind the order is the footprint of how many shares/contracts were traded and at what price they were executed.

Do I think some markets like the S&P will become much more difficult to trade on an intra day basis with a small amount of capital? Yeah I do. But there will always be emerging markets, new products etc.

Also remember that markets evolve and change to shake the majority off it's back, it must to survive. Therefore programs and automated systems will have to be constantly readjusted. That is where the discretionary traders edge lies over the machine.

Programs are executing orders within the context of an explicit understanding, A human who is experienced in market structure etc. (a professional) is working from an implicit understanding. That is the key.




P.S Haven't any of you guys seen Terminator 3? lol

[Dogpile]

This is a highly interesting topic and subject of recent books.

To me, it is clear that program trading can dominate at times. If you do not remain flexible, you will get run over by these competing algorithms that are written by extremely smart people trying to take your money.

But there is a good argument to be made that all these competing algorithms actually make 'right-brain' synthesis of complex, dynamic information MORE important. If so much money has so much compute power running mathematical programs, then the market is saturated with 'left-brain' compute-intensive strategies.

From Daltons latest newsletter (May 2007);

Successful trading is for those individuals that can continually combine the left and right hemispheres of the brain to appreciate what is occurring in the markets.

From our bookshelf:

During our trip to Chicago last month, Jim and I were introduced to a book containing a significant amount of thought provoking information. Our thanks go to Linda Raschke who introducing it to us as a 'must read'. The book, 'A Whole New Mind' by Daniel Pink, focuses on the power of whole brain thinking and how the right-brain will play an important role in the future in ones success. Chapter 6, "Symphony", provides insight to Pink's thinking.


Chapter 6 - Symphony - In this chapter Pink demonstrates how there is far more than just focusing on the identifiable, mostly left hemisphere, facts. He discusses the importance of invention and conceptual big picture thinking.

If we were to relate Pink's chapter entitled "Symphony'; to trading we might experience:


The ability to create something new and / or different such as a new type of chart, or a way to display or interpret volume, or understand a new shape nuance in the Market Profile graphic.

The ability to create meaningful pre-session and post session narratives to better prepare yourself for the following trading session. (DLC's next educa-tional letter will expand on the narrative idea.)

The ability to synthesize, combine or correlate unrelated ideas or parts into something unique and beneficial such as synthesizing the relationships between different markets and understanding how the markets different timeframes, coexist, interact and merge.

The ability to observe, interpret and understand the subtleties and nuances of human behavior as reflected in the markets order flow by understanding inventory balances and imbalances.


Today, as you know, we live in the age of information overload. Facts are at our fingertips via search engines, the media, and dial-up information services actually make information less valuable while making its relevance, interpretation and understanding more valuable. In other words, it is our ability to think with our whole brain - not just left or right, that will separate us from our competition. It is this focus that makes this book a 'must read'.

This book challenges the reader to go beyond their conventional and structured ways of thinking that were developed by both upbringing and environment. In many ways it is in the same category as Malcolm Gladwell's 'Tipping Point' and 'Blink' in respects to looking at how we look and think about things. "

[brownsfan019]

Here's my 2 cents - the more things change, the more they stay the same. If you have an edge and can exploit it with consistency, you can/will make money whether discretionary or automated. I think more and more bots will enter the markets (and add more liquidity in the process) but there is one constant - a computer programmed software package will eventually fail. There are few (if any) computer programs that can survive up, down and sideways markets.

Point being that no matter what, it is human emotions that will drive the markets. Even if a computer program is calling the shots, a human has the ability to over ride the system and decide when to turn it off.

A good example I can think of is when online stock trading became mainstream (ETrade, Ameritrade, etc.) stockbrokers (like myself at the time) were being told that this was the death of that profession. Why should I pay hundreds of dollars per trade when an online broker will do the same for 10 bucks?!?!? Guess what? The full service firms are doing just fine and their businesses continue to grow. Having been in that business before I try to keep a close eye on how the brokers are doing and they are fine.

There's always going to be a reason why discretionary traders will die. And many will. And many will use that a reason for their failure. I saw it all the time at the brokerage firm with the failures - can't compete with online, can't compete with no load funds, can't compete with ETF's, etc.

As much as a cliche as it is, only the strong will survive and for those that do survive, the journey will be well worth it.