Human Edge is Intuition

The markets are more competitive than they were 20 years ago.  Back then, there were no HFT firms front running everything.  There was more paper flow, human market makers made many more mistakes than HFT bots do now.  Even the medium frequency time frame was a lot less competitive.  The markets would take a longer time adjusting price to new information and size order flow.  Now, all the HFTs and black box programs are hyenas with a keen sense of where the kill is, scavenging away any bits of meat before others find it.  Trend moves that took all day happen in an hour, and then flat line.

If you are a size player, you cannot compete with the HFT algos in scalping and time frames less than an hour.  The slippage is too great because the HFT front runners run amok, now that spoofing has basically been legally prohibited.  The ladder provides much more useful information to the HFT predator now that the fake orders are gone.  The hand trader cannot compete in that space because of much slower reaction times to new order information.  If you are a small lot trader, you can squeeze in and out, but it is exhausting work, with the margin for error much smaller now that the HFT cops are on the beat, snapping up edge immediately.

The systematic trader has never faced so much competition in his life, with system setup getting easier and easier, and more institutions using black box trading.  The black boxes have literally turned into red boxes, from the blood of all the competition.

Ironically, the proliferation of systematic trading and algos has left the hand trader a niche that is still quite profitable.  That is if the discretionary human trader has good pattern recognition skills, a strong fundamental base for the market or stocks that he trades, and good intuition to put it all together to know when to enter and exit.  Pattern recognition is a subset of intuition, and it can really only be gained by trading experience.  But experience is only as good as how it is applied, which is what separates the profitable from the unprofitable.

A.I. and machine learning is all the hype these days, but as long as the majority of the assets under management have human discretion, they will not be able to match the skills of a good hand trader with good trading intuition.  I will always take a good human trader who understands market psychology,  investor positioning, fundamentals, and use those variables to come up with a good trade.  When traders stop discounting prices due to uncertainty, will be the day that A.I. beats the advanced discretionary trader.  I doubt that day will come.

Also, the trend towards passive funds just means that sector allocation has become more generalized, it doesn't affect a manager's discretion to change their beta exposure.  It has little effect on index futures traders.

In order to succeed these days, you have to compete in a different time frame than the computers, who excel in the high frequency space.  Medium frequency is even starting to get a bit crowded.  Lower frequency trading is the sweet spot for the human trader, who can be much better at predicting longer term moves than the bots.  This doesn't mean any human trader can beat the bots.  It takes time and innate talent to develop the skills to win at this game.  And the game changes from time to time, on an irregular schedule, making it harder.  Always adapt, but don't throw away the fundamental base that you will always need for any reliable long term predictions.

We have a small gap down after a little nasty close on Friday.  Post opex forces at work, this time towards a risk off theme as March put protection is gone.  Looking for SPX weakness this week, and next week.