Perfecting High Frequency Trading in 2020

There is Still Room For the Human Day Trader, despite a World of High Frequency Trading

We are at the age of digital disruption where new life-changing events are happening on a daily basis. In the past, moving from one invention to another took decades. All areas like healthcare, manufacturing, and retail have been affected.

In the trading world, we are in a period of digital disruption when new technologies are coming up regularly.

Consider the blockchain technology that launched about ten years ago.

Today, bitcoins, litecoins, and ethereums are worth billions of dollars!

The same is true with the high frequency trading that allows computer-generated codes to make investment decisions. There was a period of time not too long ago where it looked like high frequency trading (HFT) would completely eliminate the need for the human day trader.

These trading algorithms seemed to be more efficient, faster and cheaper than using humans, and this growth looked like unstoppable.

However, today’s world is a completely different place.

The “flash crash” of May 6, 2010 changed everyone’s view of HFTs. The pre-programmed algorithms couldn’t react fast enough to developing events and just exited the markets, resulting in a massive loss of intra-day liquidity.

Even though subsequent investigations of that day show that algos were not the cause of the crash itself, it revealed that many of them just turned off during that time.

Although algos have a significant place in today’s market structure, there is still a significant need for the human day trader. There are several reasons why.

Markets and regulators have been shifting rules to favor the human trader

The regulators in such markets as Australia and Canada have made rules that make it much more difficult for high frequency trading firms to operate.

As more markets develop and become electronic, one has to wonder what direction their regulatory landscape will take.

Many stock markets have started charging for messages sent to the market or penalizing firms that have a high order sent to trade ratio. In general a human trader has a very low order-to-trade ratio, because they are point and click traders.

European regulators have started putting rules in place (that should take effect in a year or so) that are quite obviously anti-HFT. This seems to be a trend with regulators globally. If this trend continues, human traders will be needed to fill the gap.

Human brain can process and model information that a computer just can’t

A case in point is when unexpected news occurs on a stock, even if that stock is traded by a lot of HFT firms.

Generally, in unexpected new scenarios, the HFT firms shut of their trading programs. The reason is because for at least that day (maybe even a few more), the stock is not trading in its normal pattern.

This means that the High frequency trading’s algorithm (the series of pre-programmed “if X happens, then buy or sell Y” commands) will not hold for that period of time.

There are always trades that don’t need to be made in a high frequency style

There are tens of thousands of profitable trades a day that occur at different (or longer) time frames than a typical HFT firm is looking at.

Stock markets need different traders looking at different time frames to provide an efficient market structure. In fact, it may even be HFT firms on the other side of the trade with the human trader.

The human day trader may not be able to compete with HFT firms at high frequency trading strategies, but that doesn’t mean there isn’t money for them to make!

As long as the human trader has a fast and reliable trading system, he or she will have the potential to make money.

Why and how you need to approach HFT as a trader

Teamwork

You can be an individual trader and make trading decisions. This is where you study your charts and make an investment decision.

You can also be an individual trader and still practice high frequency trading. However, if you want to be successful in this, you need to be part of a small team of people from diverse background.

Opening a Trading Office vs Become an Independent Trader

You need someone from a software development background who will help you come up with the code for your investment. This should be a person who understands different facets of development.

To be successful in this, you need to have people who are passionate about investments. They should also be highly-skilled in this field of coding.

Finally, they should share the passion and dreams that you have about trading and investments. Remember that if you don’t have a good team, chances are high that you won’t succeed in it.

How to start and make profitable your own trading office

The Code

As we have mentioned, high frequency trading enables you to have a computer code that makes investment decision. This means that it will buy something when a certain criterion is met.

For example, the criteria can be to buy an asset when: the simple moving average, stochastics, and relative strength index reaches a particular point.

The code that you develop should be effective and it should always use data that is available. The data should be a good and credible source also.

Backtesting

Not all codes will work the same. As a high frequency trader, you should have different codes for different scenarios.

For example, you can have a code for commodities trading and another one for stocks. After creating the code, you should backtest it using the data that is available in most trading platforms.

You should backtest it to ensure that you have a code that works in an effective way. The backtesting process should take a considerable amount of time as this will determine the success or failure of your code.

Regular monitoring

As a high frequency trader, you should pay close attention to how you monitor your trades. Remember that not all codes will work the same way, some will be successful than others.

The right thing to do is to ensure that you are always watching as your codes do their thing and take action when you believe they have made a mistake.

Upgrading

Finally, you should work towards upgrading the code. The success of your code will always be determined by the number of upgrades that you do to it.

As you monitor the code, you should ensure that you identify the areas of weakness and then work towards fixing the weak areas. If you do this, chances are that you will be a very successful high frequency trader.

Perfecting High Frequency Trading – Useful Tips:

  • High-Frequency Traders Feast on Volatile Market – WSJ
  • For further information visit Businessinsider,

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