Skip to main content

Why we have the advantage...and following the path of least resistance!

The last few months I have been reading a lot and trying to synthesize all the data and draw some conclusions and here is what I have come up with:

1) The internet was a game changer for the retail investor/trader (I will use the two interchangeably). Not only did it provide the masses with a medium to interact with the market, but discount brokers resulted which has led to very low transaction costs.

2) The retail investor actually has edge over the big institutions. But let me clarify some of the assumptions that make this statement true:

Assumptions:

a) The retail investor is educated in the asset class that he/she trades and continues education

b) The retail investor practices good risk management

c) Most importantly, the retail investor does not impose his opinion on what the market should do, rather they  trade price action. The truth of the matter is only the big institutions have the kind of money to move markets. They are the price makers and we are the price takers. The old adage "The Trend is Your Friend" helps clarify this point further. It is the institutions that set trends in motion. Don't be a hero and try to outsmart the market, trade in the direction of the trend whether up, down, or sideways. We have the advantage because we are small enough that our orders will go unnoticed, where big institutions have millions of dollars to accumulate any one position, it is a lot harder to hide that kind of size and not effect price.


These conclusions have led to the overall strategy that will be added to my trading business plan. My strategy will be trend following, making trades in the direction of the primary trend. If the trend is up I will trade long. If the trend is down I will trade short. And if the trend is sideways I will use strategies to expoite this type of movement as well. Now obviously there are a multitude of option strategies to play any given scenario and it will be up to me to choose the best one in each particular instance. But each trade is unique and should not be boxed in to any one option strategy.


Do you guys have anything to add?

Comments

Post a Comment

Popular posts from this blog

WOW! I think that sums it up

Many of you have been reading this blog may have noticed that my blogging frequency has increased over the past few weeks as I got short the market. As you can imagine I am down money since getting short the market, this is the time when most people pull away from posting. But my goal is to stay active and involved and show you that trading is not always rainbows and butterflies. It is times like these that the things I have been sharing over the past couple of weeks are so important. You need to trade small relative to your account. I have a decent short position in the market and my portfolios are set up to make some awesome returns if we finally turn lower. But something I would like to point out is that my account is 70% Cash.  I learned a long time ago how important it is to live by the rules you preach. Because of my discipline I am able to continue to hold my positions, I have time and capital on my side. I can't stress enough how important it is not to get to big....
Post a Comment
Read more

Stay Small, Stay Out of Trouble

To expand on my post from yesterday about patience. I want to talk about a very important element that allows patience in a position, and that is staying small. If you trade too big RELATIVE to your personal account size, you are likely to be forced to exit the trade before the trade works in your favor. Many trades myself included have all experienced the pains of trading a position way too large given our account size. There is this predisposition out there that the only way you are going to make money in the financial markets is if you are trading 10 lots of options and 1000 shares of stock at the time. This is not the case, and if this is your mentality you will likely ensure yourself trouble. We have all read the stories of traders blowing up their account. I personally think a good rule of thumb is to not risk more than 5% of your account value on any one position. Good Luck Trading! In The Money Trades And 1 favor that we ask:  If you like the hard work w...
Post a Comment
Read more
more good news from FXStreet : Tom Fitzpatrick, senior technical analyst at Citibank in New York. Monday, July 15, 2002 "Parity is a psychological, not a technical level...and whether we pause around parity or not, we are likely to see significant further dollar losses...Our initial target is $1.03 to $1.0450. If that level is taken out, it actually casts a question mark against the whole of the dollar's rally of the last seven years, and could open up a full-blown bear market for the dollar." Julian Jessop, chief European economist at Standard Chartered Bank. Monday, July 15, 2002 "The dollar is under pressure from everything from economic problems to asset reallocation away from the U.S. and corporate accounting problems. It's difficult to see any positive factor for the dollar at the moment. The root of the problem is the U.S. current account deficit. If the U.S. doesn't have to attract an enormous amount of foreign capital, people wouldn't have to wor...
Post a Comment
Read more