Most of your edge in trading stocks-in-play is coming from discretion and it’s pretty small. Of course, many bright minds will use their backtests to gain a bit more edge – and this is really helpful to know that, for instance, if you play your VWAP continuation trades, you statistically have a 60% win rate on some of those technical-specific structures. And even if the backtest itself could not make money due to commissions and slippage – you know that overall, just technically – this is a 60% win rate. So when you see this particular technical trade set up – you have more confidence in trading it. But to actually profit from this – you will have to place this technical trade into the context of a Setup, and you will place that Setup in the context of the Bigger Picture market, and then you will read the Tape to see character of tape changes to get better prices on your entries. There are many large hedge fund managers who need to operate with big position sizes and have to run buy/sell programs – so the market becomes an opportunity-generating machine for you. From the thousand opportunities that the market generates every day, you sift them through the sieve of contexts, you have to only pick trades that make sense to you – so your edge is small. You will make hard work every day to understand these contexts to make your executions – that’s what machines struggle to do. Let this thought keep you away from 1) overtrading; 2) not doing morning prep; 3) not journaling and reviewing your trading. Remember, if a machine can make your trade – there’s a high chance that you’ll be out of the game. First algos were created just to make routine work a human did before. First algos were primitive – like buy new intraday high or sell new intraday low to catch trend (and then when it became very popular – first predatory algos came along – sell new intraday high and buy new intraday low, to make money stopping out the crowd).
Gaining your edge is not an easy task – markets are highly random because markets are always improoving to be more efficient. Follow the logic – an efficient market is a market where you can’t make money – because it’s already efficient – and if you can’t make money – that means only one thing – the price action is random, because only in random price action you truly can’t make money. We know that markets are not 100% efficient, but they always develop to be more and more efficient. Nowadays, price manipulation is so advanced that most of the time, what you see is random price action to you. Take a look at this great video from @braintruffle, non-linear dynamics researcher, PhD:
https://www.youtube.com/watch?v=-jF9gW2r_bk
What you saw in this video is just the tip of the iceberg. That’s why you do your prep – you want to find stocks with real and substantial order flow and outline potential levels where you can spot imbalances in supply and demand within that order flow. Top-tier firms like Renaissance Technologies, Citadel Investment Group, Goldman Sachs, etc., hire top mathematics, statistics and physics PhDs to research the markets for a systematic edge, so it’s pretty hard to find one that can be exploited without any discretion. And if you do find one – it either requires a huge investment into infrastructure, or it won’t last long. So quants have thier own problems, as James Simons from Renaissance Technologies said – it’s not very hard to make an algo, but it’s hard to understand when to turn it off.
gl hf