As self-directed traders/investors we are constantly trying to exploit our edge in the markets, but how do we even begin to look for an edge when the professional traders seem to have a head start?

Let’s assume that you are a regular person, maybe you have a regular job or some other time consuming activity that you need to attend to every day. Is it possible in such a situation to beat the returns posted by the stock market professionals? These are the guys who get up for the opening bell and watch the market all day long until the closing bell perhaps taking a half hour for lunch in between. If you resign yourself to the notion that you can’t beat them, then you may as well just pay the institution to manage your money for you and take whatever these professionals can make for your fund. They have a lot on their side:

  • Backed by huge instituitions
  • Have risk managers
  • Can watch every tick of the market
  • Lower execution costs
  • Faster execution times
  • Surrounded by support all day long

How on earth could it be possible to beat the professional trader if you don’t even start on the same level?

To begin with, you need to assess what advantages you have over the professional as this will form the basis for you edge:

  • Don’t need to trade every day
  • Can trade small size
  • Can trade based on end of day (EOD) data
  • Can trade whatever vehicle you like

Don’t need to trade every day

As a self-directed trader/investor you can pick and choose exactly when you want to trade. You can step aside for a number of days/weeks/months if you wish without pressure from above. The professinal has to make a certain number of trades every day regardless of the market conditions

Can trade small size

The individual retail trader generally has much less money to handle, and so getting into and out of positions is a lot easier. Of course you still have to watch liquidity in some of the trade vehicles that you use, but these would be off-limits to professionals for that very reason.

Can trade based on EOD data

End of day price data for an individual stock has 4 interesting points – Open, High, Low and Close, whereas intraday price data can have hundreds of thousands of points which then can be viewed using many different time frames or tick frames. The sheer amount of data can be overwhelming and needs massive computing power in order to be viewed logically and in a timely manner. But even then, the most important data point of all the intraday data is the final close point because this represents the consensus of all market participants of all of the intraday action. Professional day traders have to exit their positions by the close so that they don’t hold overnight positions and longer term professionals will have executed all of their daily activity having tried to enter positions at the best possible intraday moments.

You can stay less emotional about a trade if you have planned an entry, make the trade and then leave it. The market will move in many strange and wonderful directions intraday, but that will all be summed up by the EOD values of Open High Low and Close (OHLC).

As a retail trader, the close price is available to you without having to sweat the intraday action.

Can trade whatever vehicle you like

As an individual retail trader you can trade anything you like and mix and match to your hearts content, whereas institutional traders are more restricted in what they can trade. For instance, you can trade S&P500 stocks, penny stocks, commodity futures, electronic e-mini futures, forex, bonds, ETFs, and so on.

Putting it all together

If you can eliminate the professional’s inherent advantage, then you have as good a chance at winning as anyone else. You can help yourself by seeking out friendlier trades which are generally out of the realm of possibility for a pro. One idea is to let the pros fight it out intraday, and then use the OHLC EOD data to help shape your strategy.

In future posts I will look at using some EOD strategies and investigate the statistical behavior of such strategies to see if any edge exists.