The markets are full of ways to make money.
There’s no “right” way to go about it. A multitude of styles, instruments, and approaches from long term, defensive, Ben Graham-style investors to high-frequency traders who hold positions for a fraction of a second. These styles take different skills, rules, and personality traits to implement.
In the systematic world, some work with teams of mathematicians, physicists and engineers to develop highly-complex strategies, whereas others follow a few, simple and straightforward rules to make their millions. And there are traders that successfully employ strategies in between.
Given this diversity of approaches, why do we advocate for simple and slower methods, particularly for beginners?
An Over-Sized Hoodie or a Tailored Suit?
Consider an over-sized hoodie. It doesn’t fit perfectly, but it’s wearable and functional. Moreover, it can be comfortably worn by many people for quite some time.
In contrast, a custom tailored suit is designed to be worn by one person. It can’t be easily shared, and let’s hope that our model doesn’t gain some weight and find himself unable to wear that expensive suit!
A trading system that is built to be a big hoodie isn’t going to hit every trade, but it’s simplicity gives it flexibility and diversity — it can be easily applied to different markets and securities. It’s also less likely to over fit to the data and will be usable even if market conditions change. This is often achieved via combining a few simple indicators and filters. It’s easy to test and will perform well in the long run, just like your favorite sweatshirt!
A trading system that is custom tailored to a single market or security may provide outstanding results out of the gate, but it’s going to be much more fragile in the long run. If market conditions or correlations change (they will), you’re going to see performance degrade quickly and may give up a lot of those gains you had previously racked up. Additionally, you’re probably going to have a hard time applying that same model to equities and commodities or bonds or crypto or currencies without a lot of additional customization and fragility. Just like staying in shape to keep wearing that tailored suit over the years, you’re going to need to put in a lot of work to stay on top of that system!
How Fast do you Trade?
I mentioned we advocate for simple and slow. So what do we mean by this?
Often times, traders talk about trading speed. This refers to how quickly your system moves in and out of positions.
In the fastest lanes you have the high-frequency traders (HFTs) who trade on fractions of a second to get fractions of a percent. They can compound these tiny wins over time due to the large volume and make good profits as a result. We don’t provide tools to compete there and don’t recommend retailers even try. HFTs often invest millions in co-locating servers at exchanges like the NYSE or NASDAQ to cut down on time between price and their algorithms (literally, data beamed from New York to Chicago, for example, is too slow for them). If you, as a retail investor try to compete there, you’re going to get killed.
We’ve got scalpers who look for lots of small wins, but at slightly longer time-scales than HFT guys (seconds to minutes) and day traders who might hold a position for a few hours before exiting.
Getting slower, positions may be held for a few days or weeks. This is often times termed swing trading. Then you’ve got longer term systems such as some trend following systems that will hold for months or years if a trend develops and continues.
We like systems in these last categories for a number of reasons.
First of all, data is cheap and readily available slower speeds. Just take a look at the pricing from this data provider:
This ranges from $600 to nearly $6,000 to go to faster and faster data — and this is just for a one-time download! You also have to pay monthly subscription fees to keep your data up to date, and, if you’re going to trade off of this high-speed data, then you need to figure out data streaming solutions to get it live.
Slowing things down is much cheaper — you can buy annual data subscriptions for all US markets for a few hundred dollars, or get it for free going back 15+ years, but with limits on your API calls.
This reduced price point makes it much easier and more affordable to get a variety of instruments from a diverse array of markets to develop your trading system.
The price doesn’t need to be precise. If you’re trading rapidly and betting on small moves, you need instant data and execution of your trades. If you don’t get it, you can run into issues such as those discussed by Warrior Trading’s Ross Cameron below.
Interactive Brokers took 30 seconds to 1 minute to execute a trade, which is inexcusable for his fast-paced strategy because he needs to be in and out of the market in no time.
If we slow things down with a long-term trend following system, for example, we can enter a trade from one day to the next without really feeling it in our P&L because the strategy is much slower. A 1 or 2% difference on the entry isn’t going to make a big difference in the long run — especially if that means you’ve reduced your risk by waiting for a signal to be confirmed.
Fitting Trading into Your Life
Some people enjoy sitting at their computers all day watching screens and trading. This isn’t possible for everyone, especially those who have full-time work or family obligations and are looking to boost their returns on the side. Slower systems can fit into your life more easily if you’re only checking it for trades every few days or once per week.
A Trading System Built for You
We clearly have our biases. We like systems that are slow, simple, and robust — especially for new traders. However, we never advocate a one-size-fits-all approach.
At Raposa, we build software and trading tools that provide you data and flexibility to customize a system to your liking. You can run backtests and develop a strategy — simple or complex — to suit your needs with just a few clicks of the mouse. We’re building the future of retail trading by putting quant tooling at your fingertips.
Try our free platform demo here!