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A retail trader of equities and options may believe that his technical signals and fundamental analysis is superior and smarter than the other retail traders. Maybe for some it is true.

For a lot of others, it is not, so their profits and losses are random.

As a retail trader, how can I go about trying to find trades with a positive edge. I am just looking for general guidelines. Because specific guidelines in this regard will only work in specific situations.

As a contrast, a market maker has a clear and defined edge that is easy to understand intuitively. The edge is the bid ask spread. It is clear and measurable.

How can a retail trader go about finding trades with a clear edge? Is it even possible based on only publicly available information ?

  • As a retail trader you can control entry, exit, and adjustments, with changing market conditions. Michael Catolico wrote a short article on "Trade Adjustments", You may find it useful. – Optionparty Apr 2 '15 at 15:11
  • Yes I have read it. Adjustments work when the trade is going in your direction, to lock in partial profits. When the trade goes against you, not so much – Victor123 Apr 2 '15 at 15:19
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Yes, it is possible, there is a lot of induction and deduction that is necessary, but either way the market can stay irrational longer than you can stay solvent.

You can also trade based on dollar strength (deflation) and weakness (inflation) as stocks and commodities (and the cost of ALL goods) are linked to the price of the dollar. So that's macroeconomics, and then on individual stocks you can make predictions based on your own research into that company's supply line and understanding their risk factors and debt:assets.

I typically find negative information easier to trade because it is easy to see how much that is already worth to the market cap, than positive information where you don't know what the market will decide it is worth. Like if you see Lumber Liquidators on 60 minutes suggesting their whole supply line is contaminated, then you can calculate a good support level based on how much in debt or not they are, and calculate how much intrinsic value a long put option will get.

But I personally rarely trade directionally, or individual stocks. There are a lot of derivatives that have very little or nothing to do with actual economic output or raising capital.

  • So if you are not trading directionally, what is your source of income/profit? Theta decay? Voaltility spreads between realized vol and IV? Dividend arbitrage? – Victor123 Apr 2 '15 at 14:58
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    Long-term investing and index funds still deliver market-rate-of-return or a bit better, with much less effort and risk... It isn't necessary to find an edge to win in a positive-sum game. – keshlam Apr 2 '15 at 15:06
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    This is why most of us have day jobs and use investment only as a secondary source of income. :) As much as I know about the market, I would never try to day-trade independently. – dg99 Apr 2 '15 at 15:27
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    @Victor123 if I ever write a book about what I'm doing, the opportunity will already be closed or will change when it is disclosed. But people will probably still attempt it, just like all the kids using technical analysis from the 1980s. All the edges are always counterintuitive. – CQM Apr 2 '15 at 15:33
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    @victor123: Easy: sell only when you have good reason to: rebalancing or making major purchases or in retirement. Trying to time the market and obsessing about edge conditions is too much work for too little gain, in my estimation.. And your day to day funds don't belong in the market for the same reasons. If you're being forced to churn your account, increase cash and near-cash reserves. – keshlam Apr 2 '15 at 18:28

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