“Emphasis on strategy is so misplaced” says professional trader

Individual traders using retail platforms who have managed to gain traction over the period since MetaTrader 4 brought a new type of market into the arena by cleverly marketing their ‘strategies’ have polarized opinions among trading communities, brokers and retail customers alike.

Gone are the days of the early Millennial period in which self-styled, overtly brylcreemed dandies trotted out their immeasurable success via YouTube and forums with imagery of equally gauche lifestyle trappings such as yachts, performance cars and helicopters.

Today, the retail FX brokerages that were seen as upstarts in the mid-2000s that had no possibility at the time of gaining client bases such as those sustainable, loyal and experienced customers of Interactive Brokers, IG Group, CMC Markets FXCM and Saxo Bank have now risen to prosperity, in some cases making revenues of $500 million per month, and have along the way enlightened traders to the point that what was an entire cross section of newbies fifteen years ago is now a data-driven, analytical and astute base of retail customers who really know their market.

They know their product infrastructure too, hence the ill-fitting suits of the fly-by-nights are thankfully now banished to the fringe.

Where does this leave today’s strategists? It is hard to gauge, however it is vital to brokers because today’s paradox is to ensure that clients have the right tools to ensure that their requirements are catered for, whilst also carefully positioning them so that it engenders client loyalty, which is an increasingly hard and expensive conundrum for marketing and sales teams.

Today, a professional trader in North America provided his perspective on how he views strategy in today’s retail trading environment.

“This is a recurring theme that’s come up in people reaching out to me. I’m getting asked a LOT about my ‘strategy’ and getting requests to review your strategies / trading plans It got to the point where I was copy / pasting the same reply to a number of people” he said.

“Strategy is really important. You definitely need a cohesive strategy or set of strategies that help determine what gets you in and out of trades. I personally run a mechanical trend-following system in addition to my discretionary style of trading. Even my discretionary style of trading however, is viewed through a framework that gives me consistent structure to follow on trade after trade” he said.

“Now that I’ve gotten that point out of the way, here is my next statement:* Strategy is completely useless without having a thorough and expert understanding of the markets in the first place” he continued.

This particular trader’s analogy is “Let’s say you really want to get into the fast food business. Now let’s say you’re fairly smart and you realize that your best chances for success are to buy into an established franchise, for example McDonald’s, Taco Bell, or KFC, that level of fast food. Now here’s the kicker, who do you think is more likely to succeed at running this franchise? Someone who has worked within the industry their entire lives and knows it inside and out, versus someone with no industry experience. Okay, okay, that question is completely rhetorical; it’s obvious who has the edge here.”

“Trading is no different, and it’s why buying a course or finding a guru has let so many retail traders down so many times before. You’re trying to follow an established plan, one that has in fact quite possibly brought success to whomever is selling you their wisdom, but without an expert understanding of the industry you are participating in” he said.

This is a very important point to consider. Over the years, FinanceFeeds has unearthed all of the self-titled ‘training’ companies, many of which are in highly regulated jurisdictions, that are simply ripping off not only traders, but retail FX brokers as well, because educational products fall outside the remit of the regulators.

One firm based in London, operates from a custom-designed yacht on Millwall Dock. (I live near it, and it is as blatant as can be – Ed).

Its proprietor purports to have been a former Citigroup interbank dealer during the 1980s, however it is impossible to check such credentials for validity.

His course is intended to be two days, however it is often just two hours in the morning, two hours in the afternoon, with a demo account being traded by the trainer, the business model being to sell a system which is sold under the pretense that it will generate massive returns for novices, and the course being the basis for it.

This can cost anything up to $6000 ($3000 for the software and $3000 for the course), and then the trainer signs the delegates up to accounts with unregulated brokerages, then splits the losses.

The reality is dejection and a shadow cast in the minds of the novices never to trade FX again. The regulatory authorities are also not able to intervene. FinanceFeeds has contacted the Financial Conduct Authority (FCA) about this matter, the answer having been exactly as aforementioned, that ‘educational’ entities are outside the remit of regulators.

FinanceFeeds does not agree with this ruling, on the basis that these are not providing educational resources, but are actually giving financial advice without the accreditation to do so, and encouraging people without the necessary skills to engage in very high risk positions. This is something that does fall under the FCA’s remit, but because the entity is classified as a provider of training seminars, there is no investigative jurisdiction.

Meanwhile regulators from Europe to Australia are curtailing how regulated products are being sold, yet allowing one-man-band con artists to rip off retail traders with dubious ‘software’, demo account false trading ‘advice’ and loss splitting between trainer and unlicensed FX broker that said trainer refers his captive audience to, as in “once your training is complete, we will sign you up for a trading account” which will be on an IB arrangement with a B-booker who splits losses.

Additionally, it is not unheard of for the less scrupulous trainers to ask for a fee up front from a broker, then never actually provide any clients.

This way, the ‘trainer’ gets his fee from the student traders for the training course, a subscription fee to ‘software’, and also a profit-and-loss based  revenue share from the b-book firm which will zero their trading account.

Thus, the professional trader’s anecdotes are valid, but it works both ways in that traders need to be able to work out which of these strategists is valid, and which is not, and that in itself is an impossible minefield to navigate.

Today’s perspective from the professional trader who made his views known then moved to technical analysis. “Let’s take what seems to be the dominant retail route of pure technical analysis. If you don’t know technical analysis inside and out, you are not setting yourself up for success when you buy a course, or even read through a free one like BabyPips. After doing a rough search for Forex courses, I haven’t found any technical ones that actually teach you about technical analysis and not just are feeding you a strategy.”

In FinanceFeeds opinion, it is more prudent not to go down the route of such courses, therefore we would agree with the trader here. Instead it is perhaps more cost effective and of greater value to work with brokers that have a license to integrate Autochartist or Trading Central into their product, because these are proper analytics and charting platforms that are completely aligned with the FX brokerage industry.

“My entire point here is that if you don’t engage with the nuts and bolts of the arena in which you’re competing, you are at an inherent disadvantage. For example, I’ve talked to a trader that had Stochastics, RSI, AND MACD on their chart. What is the point of having 3 momentum indicators apart from enjoying a gratuitous circle jerk of redundant ‘confirmation’? But this trader didn’t know the math behind the indicators, what makes them similar and different, how they can be applied. If they did, then maybe they could have explained in greater detail how having those 3 gives them a defined edge” said the trader.

Following on from this, a non-professional trader who has a day job commented “In my opinion as a data scientist, the most optimal strategy should be testable, repeatable and profitable. From what I’ve seen on here, everyone tries to go for the profitable part first the they ignore the other two which is why they fail. If your strategy doesn’t involve some type of statistical analysis that is able to be repeated every time you want to put a bet in then you’re most likely not going to be profitable in the long run.”

He concluded “The real market moves are from robots that have the 3 qualities I listed above. That’s what you’re going up against. Humans can’t really beat the high frequency algos in the long run.”

That is a very valid point indeed.

It is interesting that at a time during which the ability to compete against algo-orientated proprietary traders is very necessary  – a point meted out in detail by Dr Richard Smith of Tradestops during his speech at the FinanceFeeds Thought Leadership Conference at The Ned in London in May – brokers and traders are embracing self-directed trading and providing very elaborate and sophisticated tools for traders to improve their own manually-traded strategies.

The only allusion to automation that the retail sector has taken in large doses is the Expert Advisors (EAs) that are part of the reason for the continued use of MetaTrader 4. Despite this, reliance on EAs has dwindled slightly recently, especially as many brokers have cut their introducing broker (IB) network back due to commission exposure and the cost and risk of the regulatory supervision of partners by brokerages working with them.

Many IBs have traditionally used MAM accounts and connected their customers trading accounts to a master account on MetaTrader 4, then automatically traded the whole lot using an EA, a practice absolutely dominant in South East Asia that has made brokers (and many clients!) a fortune.

Last week, here in London, FinanceFeeds spoke to the CEO of a large brokerage who told us “We are doing away with all MAM accounts”.

So, if all this is the case, it is interesting that we are not going toward algo for retail traders, and instead are encouraging manual trading and the expectation that traders will be able to navigate complex instruments on equally complex markets via complex software, will be able to avoid the nefarious ‘educators’ or rely on EAs.