Monday, August 04, 2014

The Golden Age of Trading and Investment--And Its Challenges

Tadas Viskanta, in 2012, made the argument that we are living in a golden age for individual investors because of the availability of data, the increased access to markets, and the ability to trade multiple asset classes and strategies via ETFs.  As Tadas observes more recently, costs have come down significantly for individual traders and new ETF products place individual investors in control of their fate.  If you take a look at Viskanta's Abnormal Returns site alone, you'll see an array of information that simply would never have been at the finger tips of a trader or investor when I began my involvement in markets in the 1970s.  

This is not to say that problems with markets don't exist.  Concerns over the impact of high-frequency trading strategies, as well as the distorting impacts of activist central banks, have affected traders and portfolio managers alike.  Still, the fact that we are so aware of these issues is a testament to the democratization of information via the online medium.

Allow me to point out developments and innovations in the trading and investment world that simply did not exist when many of us began trading:

1)   Punch up any stock symbol and you can identify how many people are talking about that stock and whether they are leaning bullish or bearish, via StockTwits.

2)  With a couple of keystrokes, I can identify how many stocks--and which stocks--are displaying buy and sell signals across a wide range of technical indicators via StockCharts.

3)  I recently identified a promising pattern in trading SPY, backtested the strategy and confirmed its success in- and out-of-sample, ran appropriate statistical tests, and produced the TradeStation code to automate the idea as a trading system--and the entire process took 20 minutes via Adaptrade.

4)  Individual investors can now trade baskets of stocks or ETFs and create/manage truly diversified portfolios for a single commission fee via Motif Investing.

5)  Developing traders and investors can trade any market in simulation mode, playback market action for review, and collect detailed performance data on their trading--then go live and place orders straight from their trading screen via Ninja Trader.

6)  Traders can screen stocks for any given pattern, backtest the effectiveness of the pattern, and obtain trading signals for that pattern in real time for any chosen group of stocks via Trade Ideas.

7)  Traders can see how much volume is occurring at market bid and offer prices and place that within the context of longer-term market action via such apps as Market Delta and WindoTrader.

8)  Want to listen to the world's greatest investors, traders, researchers, and market observers?  Interviews are archived for posterity via podcasts from Michael Covel and Barry Ritholtz

9)  Individual investors--not just ones with high net worth--can now participate in hedge fund and other investment strategies via such alternative mutual funds as Simple Alternatives

10)  Have trade ideas for several stocks?  Tools now enable you to use the pricing of options for your stocks to estimate the probability of hitting various targets and identifying best trades via Interactive Brokers.  

Indeed, where the individual investor and trader struggled in the past to obtain timely, relevant information, now we are awash in data, challenged to extract pertinent information.  Where investors were limited to a few basic types of investment in the past, now ETFs open the door to true global macro investment and trading for the individual.  

The challenge now is for greater financial literacy.  The next great strides for individual investors and traders may come, not from ever more products, but from innovations in education, training, and advising that help people make better decisions with the dizzying array of options and information now available to them.

Further Reading:  Resources for Continuing Trader Education