Ever wonder what the professional retail trader will look like in the future? I often wonder since I know how important it is to constantly evolve with the game. If you think what works today is going to always work, then you will be left behind. Human behavior does not change, but regulations, volatility and access to information does and this makes or breaks strategies. I posed this question to someone who is on the forefront of this business and I was able to validate his answer with information from an expert trader who is all about evolving with the environment.

Since the beginning of speculation, it is the minority with the right information and the ability to act on it who wins while everyone else serves as liquidity. Back when I first began trading equities, our advantage was speed. We had T3 internet connections plus our hot keys programmed into our platform. When buyers rushed into a stock, you just pressed a button and you were in before all the internet and phone people. Those days are long gone and the traders who could not evolve from that are no longer trading. The high frequency crowd closed that window of opportunity. So if you are not a financial engineer who can create algorithms that compete for nano seconds of time, then what do you do? Find another way to compete.

Have you seen what has happened to the traditional open outcry trading floors? Innovation has wiped them out. Pit traders had the advantage of instant information. They saw the supply and demand as it came into and left the market. Plus they had access to huge amount of liquidity which they could trade in and out of very quickly and easily. Then the rest of the world gained the ability to trade and a reasonable cost plus access to a lot of the basic information that they had. That game is over. The few trading pits that are left will eventually be replaced. The NYSE is now a TV studio for the media.

So when I asked my source where he saw the evolution of the retail trader going he told me that he foresees a discretionary trader who is going to be much more integrated with algorithmic tools. Tools that go beyond fancy charts. These advanced tools will help you make trading decisions by selecting which of your orders fits enough criteria to justify an execution. These tools will also manage your trade for you once you are in the position. The trader still needs to know how to trade, and know what to look for in the market generated information, but the trader of the future will be less involved emotionally.

Imagine the advantages: This trader can trade many instruments simultaneously and not worry so much about spending too much time on a market that is not producing. Also this trader will have more confidence since the computer will filter out many impulsive and erroneous trades. And more confidence leads to more trades and larger size.

More detail will be analyzed at faster rates. People who think they will just be able to use a chart and some news feed to make trading decisions are going to be the ones on the wrong side of the trade.

What is even more interesting is the technology already exists for the pairing of the discretionary trader with algorithmic tools. A colleague of mine who is connected to the cutting edge of financial engineering technology is already employing such advanced tools. He can click a buy order, and the computer will only let the order execute if very specific conditions exist which are quickly detected by the computer. Emotionally, he is mostly removed from the situation. He just needs to utilize his experience to judge the general conditions and the computer does the rest.

I am very stubborn and because of that, it has taken me a very long time to realize that in order to compete in any market, you must have access to the most relevant information. As this game evolves, information will be interpreted in newer and faster ways. If you intend to compete on a professional level, you need to recognize the value of the information you have. If it is not adequate, then you must make the changes and this means you are going to have to find the right tools and make the investment. If you think this kind of information is going to be cheap or free then you too will be left behind. This is why a quality education is so important.

—
Marc Principato, CMT

Risk Disclaimer

*No Relevant Positions