Tuesday, March 16, 2010

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:


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?

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