High Frequency trading has had its share of positive and negative criticism. It all depends on which side you, as a trader are on. With its advantages that it gives to large corporations and banks, hedge funds and institutional investors, it is perceived to be good. But if it is a small firm that one is looking at, then one is certainly at a disadvantage. Before analyzing the good and bad of HFTs, let us first know a few facts about HFT.
Facts about High Frequency Trading
- HFT is a program trading platform, where fast computers are used.
- It uses algorithms and mathematical models to arrive at decisions with a matter of a few seconds.
- They have transformed the way trading happens, quite drastically, all over the world.
- Algorithmic trading such as the high-frequency trading helps in making prices of stocks less volatile and also the cost of the overall trading is significantly reduced.
- They provide the essential liquidity to markets.
Understanding HFT for your business
Understanding the HFTs inside out is imperative to get a clear picture of things. The fear of the ordinary investor getting lost in the maze of high frequency trading is a recognizable one. But it is not a bad scenario altogether. Many experts have an optimistic viewpoint when it comes to HFTs. They are of the opinion that high frequency trading can be beneficial to markets and all types of investors. It is not at all predatory, as perceived by a section of people. This kind of trading has lowered costs along with tightening spreads and adding liquidity to the market.
High frequency trading is a league in itself. This type of trading competes with other entities of the same proportion and not other players which are not in the same league. Automated trading allows many trading firms to scale up. There can be many asset classes, many products, and many platforms. They are also a cost-efficient system so that one can trade well in different places all through the day.
Automated trading systems
Many automated trading systems and platforms are gaining prominence for the convenience that they offer to the traders. One such thing is the Fincrowd app that lets people trade efficiently, even without having a significant knowledge about stocks and trading. It is a supposedly efficient system that provides users many advantages, including making some good profits.
Trend traders aka riders are people than locate a trend on a market and ride it out until its end. This might sound easy, but it requires a lot of management and constant observation. If the stock goes up the trader is in the money. Trend riders don’t care about ups and downs that happened during the trend. The most important thing for this kind of the investor is that the price is going up.
The basics of trend trading
The trend trading is not for the meek and emotional people. To become a successful trend hunter, you have to remove the emotions from the business. Instinct is also obsolete in this business type. An individual that invests in this way has to follow predetermined rules. Any deviation from those rules might end in a partial or complete loss. It all comes down to the management of the risk. To do this properly, the investor has to use market price and volatility and the account balance.
The very nature of trend trading is the reaction to the market. It starts with the initial investment that has to correspond to the amount of the cash left on the account. As the market shifts up and down the investor has to increase or decrease the investment size. The point is not to be too jumpy and abandon an asset due to the fear of the price going down.
Why do people jump on the trend trains?
The question has several answers that we will list and several others you will have to find for yourselves.
Even the down market can generate a profit. But the trader needs to follow the ongoing trend all the way to its conclusion. An experienced trader will turn big cash around with a trend like that.
Contrary to other short-term trading that involves everything from fundamental analysis to assisting software like Online Wealth Markets, the trend rider doesn’t require the info those things provide. Once the investor located a trend and invests in it, the profit is guaranteed. The only unknown in that kind of the deal is the amount of the profit the trader will earn.
The job of the trend trader is to react to the trend and not to predict it. He will not predict the end of the trend or its beginning; he will react to the changes that happen. Predictions will interfere with the strict rules that compose this strategy, and they are a big no.
Trend rider will always aim at the maximum return, and that means to ride the trend to the very end. To achieve that and to maximize the returns the trader has to manage the risk. The investor has exit protocol that will get him out of the deal at any possible moment. That might reduce the returns, but if the trader decided that the risk exceeds the possible returns, then they will pull back. In that way, they will still have a profit which can be invested in other stocks.
Trend trading is a form of trading that requires some strict rules. Not following those rules makes the trend riding impossible. Every trend rider has to follow those rules if they want to earn money. Those rules encompass all aspects of the deal, from the initial investment up to the trend conclusion.
Even though there are the rules that guide the traders through the whole process, some of them still make mistakes. Those mistakes may be small and simply diminish the return, while others cause the negation of the profit or in some cases the loss of the investment. The latter two rarely happen, but there are always new traders that will try to change the rule-set because they found a better way to earn the cash.
The basic rules for trend traders
The only tool the trend rider requires is the chart or several charts. The charts are the only source of information that will accurately follow the trend as well as the beginning of one. An event may or may not start a trend, and that is the chance a trend seeker will not take. Why to risk the investment when they can wait for the beginning and jump on the train that is on the move.
Once all indices (only major) go bullish then the trader will glue their eyes to the charts and wait for a breakout (the beginning of the trend).
Once the deal is on the trader should forget about it. They should pay attention to the charts as they will inform them about their next move.
A smart trend rider can earn some cash from short-term deals on the same stock they trade with. The opportunity arises once the countertrends start. They start due to news and events that are contrary to the trend. They won’t affect the ride, and with smart investments that ride the countertrends can generate a nice return.
Mistakes that some investors make
The risk of the loss exists everywhere, and the mistakes people make cause those risks to spiral. A certain portion of traders uses systems on their trade rides. Those systems might be good in the normal run, but they are both late to the exit, and they are easily shaken out of the trend. Software like that works on other markets,Online Wealth Markets in binary options, but they are almost useless in trend riding.
A false start may ruin a trader who reacts too quickly to the breakout. The false start is the failed breakout that is usually followed by the real one. The point is to recognize it as a false and wait for the right start.
A trader must leave their emotions out of trading. But that is impossible for many. That is why some people pull out of the trend too early. They might be satisfied with the return they got, or they might have been scared of the potential loss. The fear and the greed are two very different things, and yet they are the archenemies of a trend trader.
This is the question on which the majority of people would and will fail to answer. In the ever-changing world of different exchange markets and the plethora of the traders, who among them considers themselves as a momentum trader? Well, the answer is not as simple as you might think. The basic answer to the question is indeed simple. But to convey the full explanation that is understandable by everyone is a task that requires a bit more extensive article.
So, who are those momentum jumpers?
Yes, jumpers. Why, because they jump on the momentum of the trade. A trader like this will wait for the obvious signs of an acceleration of the price movement, and they will buy in on the deal, taking the position they find favorable. The speed of the movement determines the extent of the return these people make.
Mental discipline is one of the primary requirements for this kind of exchange. The trader has to wait for the price to reach the certain speed to jump on it. Failure to wait might backfire as the movement may slow down or draw to a halt. We can recognize two types of momentum jumpers:
- The event-based momentum trader will jump on the deal that follows a large event that will obviously have an effect on the certain stock. The volatility of the market becomes very high after the release of the news (the event). That increased volatility may last for several hours, and during those hours the price goes up and down in uncontrolled patterns. This is the right trading environment for this type of trader. In those several hours, he invests in the asset numerous times, changing the calls as the price goes.
- Technical-based traders base their investment on the expectations versus reality on the market. They use the reasoning that the prices of the stock don’t reflect the true value of the same. They buy or sell the stock and wait for the price to reach its real value.
Some basic momentum strategies
A large number of these trades happen within an hour, and it is hard to keep the greed out of the way. Inexperienced players fail to make a profit simply because they don’t know when to pull out of the trade. Evading the saturation point is something every trader will have to learn if they want to earn money with this type of business.
An experienced momentum jumper will work only two hours per day, the beginning hour of the trading and the closing hour. The increased volatility at these times allows the trader to increase the amount of potential return. One of the basic rules of momentum trading is to close every trade, no matter whether it closes on the loss.
Other exchanges have their momentum traders as well. Even in the binary options trading and its big brokers you can find momentum investors just click here. They keep on buying options with the same underlying asset, only changing their calls according to the changes in the price movement.
This form of exchange is another similar, but different form of day trading. This exchange type happens on a larger scale, in shorter time intervals, and with very small return opportunity. This places the intra-day trading into the most risk heavy exchange market. The conditions of the market change rapidly and the winning trade can turn sour in a matter of minutes. The understanding of the charts and the ability to perform quick technical analysis are the skills an intra-day trader needs.
The investor has to monitor several different data sources (charts) and performs multiple analytical analyses at the same time. This requires full commitment to the trading. Due to this rush-hour, the traders pick one trading session per day, some more extreme individuals go with two. The experienced traders can earn a lot due to skills they developed over the course of trading. Those skills include the ability to recognize patterns without any help. This makes it possible to avoid any form of analysis and still have a fruitful trade.
Rules that every intra-day trader follows
When the deal goes sour, a trader should use the stop option that will reduce their losses. They will not negate them; only reduce the amount the trader loses.
Considering yourself as an investor is incorrect. An investor is someone who invests money in stocks and shares and keeps them for very long time. The trader is the individual that buys and sells those shares to gain smaller profit in short period.
Investing more than you can lose is a bad move. It’s always smart to have funds to get you out of the possible loss. If you invest everything, then you risk total loss, and that is not the way an intra-day trader operates.
Trading anything but highly liquid shares is insanity. Those shares fluctuate quite frequently, and that is excellent for intra-day trading.
An intra-day trader is satisfied with a small return. Greed and fear are two big enemies of every trader, including this one as well. Greed will make him push his luck and fear will force him to pull out of the trade too early. In both of these cases, the trader suffers some loss, whether it is the loss of profit or loss of the investment.
Intra-day scalping trades
This form of exchange is the extreme version of the intra-day trading. The point of scalping is to spend the least amount of the time on the market. This does two things for the trader. Scalping reduces the potential risk of a loss to a minuscule percentage. The risk is almost non-existent. The profit margin is very small which forces the trader to perform dozens or hundreds of trades every day.
Entering hundreds of deals every day is almost impossible. To overcome this obstacle, the traders created systems that take over the trading process. Website like 10Best Binary Robots takes over the whole process, including the technical analysis. Do note that this system above works only with binary options.
The difference between these two types of exchange is evident. The active deals aim at fast turnover while passive trader seeks long-term investments. Due to this, they look for markets with different volatility. The effort they place into various aspects of the trading is also evidently different. Active traders might read everything about some company, investigate it to the bone and then decide to invest. Passive investors want the return from the investment, but they don’t want to spend hours upon hours glued to the screen filled with financial reports. Each of these two types has their advantages that appeal to certain groups of people.
The fanaticism of active traders
Active traders mind borders on the fanaticism. They think about the stocks and possible trades at every point of the day. Those that have to trade as their primary source of cash spend almost every minute of the day glued to the charts, news and other sources of economical info. The thorough investigation that results in a successful trade is the goal of an active trader. The larger a number of trades they hit per day, more energy and willpower they have to continue like that tomorrow and the day after that.
Active traders want to profit as fast as they can get it, and many of them limit themselves on day trades. This allows them to invest in price fluctuation of the stock in the short period. They rely on technical, rather than fundamental analysis. They take on multiple trades per day to increase the possible profit.
You can also find this kind of people in binary options as well. It’s hard to recognize them as many use auto-trading software http://cybermentors.org.uk/ to skip over the research and analysis stage. This rarely works as they bring no insight into the trading with themselves.
One of the negative sides of this type of investment plan is that there is no actual long-term plan. An active trader can earn a lot within a span of days, but they can lose all of than in the same time frame.
The patience of the passive traders
Passive traders will gladly perform the research and check for the state of the industry as well. Once they complete all the preparations, they will invest their money in the shares, and they will wait. They buy the shares and wait for the right moment to sell them. That moment might happen in three months, or it might take two years for the price to go up. A passive trader is willing to wait for no matter the time, as long as he earns his share at the end.
The party that enters this kind of deal doesn’t bother with daily price changes and other short-term data. The price of their asset is the only thing they are interested in. The majority of passive traders respect the ten percent rule. This rule states that if the price goes down where the investor risks losses over ten percent of the investment they sell it, as it is, to keep the loss at a minimum.