Monday, December 23, 2013

Technitrader Weekly Stock Analysis: “Are Efficient Markets Good or Bad for Retail Investors and Traders?”

MetaStock® SPRS Series - Week 150 –December 20, 2013 - MetaStock Spatial Pattern Recognition 

Skills Series written by Martha Stokes CMT

Over the past 20 years, the markets have become more and more “efficient.” What is meant by this term is that the spread between the bid and the ask across all trading venues has shrunk to mere pennies.

Technology has been given credit for the new efficiency, creating more opportunities for every market participant group, all 9 of them.   However, this efficiency has come with a higher cost than most market participants want to admit.

There is no doubt that the markets are highly efficient, but this creates new order execution challenges and consequences not foreseen by those promoting efficiency.

First, there was the increased competition among venues, from new exchanges such as BATS and ICE, to more ECNs, and more and more Dark Pool or off-exchange platforms for order processing which totally altered the trading strategies and techniques of all professionals.

It also wreaked havoc on the day and intraday retail trader, although few retail traders understood that their inability to gain profits day trading was not due to some “conspiracy to get the little guy” by market makers, or Wall Street, but was an internal massive disruptive technology that was reshaping the very core of the market structure: how orders are processed and pricing structures across all venues.

Next came the elimination of fractions replaced by decimals which further aggravated the disparity between the professional side and the retail side.  Retail traders began settling for smaller and smaller profits which then forced them to choose cheaper brokers, abandon trading tools, software, charting, and other necessary and vital tools and aspects of their trading process.

What has happened is many retail traders are feeling the pinch of lower profitability even more.  Here’s what to expect in 2014.

Efficiency has destroyed the once lucrative trading style called “daytrading,” a term that covers many various intraday strategies used by stock, e-mini, and options traders.

Instead of taking advantage of the new market structure, most retail traders are stuck in a mire of outdated strategies continually promoted by retail vendors and, in particular, retail brokers.

The latest retail broker promotions are all about mobile order processing and using your mobile device to choose a stock to trade. This is reminiscent of the final days of the Wade Cook disaster when he started using cell phones to notify his followers of his buy or sell orders.

This caused a massive loss to a huge number of options traders and ultimately led to his imprisonment for fraud.

Back once again also is a new version of the red light/green light entry exit signals.

The problem with both strategies and new broker promotions is that neither considers what retail traders actually need to be successful, both promotions only go after what they presume retail traders want, not what will make them successful.

Sadly, most retail broker firms, vendors, and software companies that cater to the retail 
trader do not have a staff of traders actually trading stocks, options, or e-minis.  If they did, their entire marketing campaigns would be utterly different.

Instead of chasing the get rich-quick-schemes, traders need to focus not on what they think they want, but what they NEED to be successful.

Buying stocks while you are driving your car or eating in a restaurant via a mobile device is not something any highly profitable professional would do. Impulse buying makes retail vendors wealthy, but impulse buying of stocks is the main reason why so many retail traders are still not breaking even. Retail traders NEED to trade like the professionals do; unfortunately, very few retail traders actually have access to professional traders.  They only have access to retail traders teaching retail traders.   This is a fact most retail traders do not know.

For more information on trading go to How NOT to lose money in the market.

Trade wisely,

Martha Stokes CMT

Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
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The efficient market hypothesis posits that all available information is already reflected in asset prices, leaving little room for investors to gain an edge. For retail participants, this concept can be both a blessing and a challenge. On one hand, the transparency and quick absorption of information in an efficient market can provide a level playing field. On the other, it raises the bar for those seeking to outperform the market through traditional means. Divorce Lawyers Stafford VA

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johnsmithp486 said...

Martha Stokes' article explores the impact of market efficiency on retail investors and traders, highlighting the challenges faced by retail traders due to the proliferation of trading venues, shift from fractions to decimals, and outdated tactics. Flyoke