Monday, August 3, 2009

How David Beats Goliath

Trading is the game in which Goliath and David are consistently fighting: On one side we have institutional traders, mostly banks, with all computing power of the world; with best quants on the world; with guys that are paid millions of dollars to make decisions. On the other side, there are small guys, operating in small rooms, armed with one or two PCs and Internet connection.

If you face and ask any of these Goliaths if there is a way for David to beat them consistently and survive in trading game, they would probably simply say that such path doesn’t exist. Is there truth in it? For sure there is! Big institutional traders think that small retail trader cannot make money consistently enough to survive. (I guess, statistics is on their side too.) I kind of agree with such thinking, but I would say that retail traders can’t make money if they are to play the same game that institutional traders are involved with.

History is showing us many examples in which David beats Goliath and one simple recollection from the top of my head is from the world of sports - as small teams do beat big teams often enough. How they do it, and how retail trader can make money in the game where his odds are much smaller than odds of big guys?

I believe that first and most important decision is not to play the game in a very same way institutional traders play it. They move millions or billions in one transaction. Retail traders don’t have that capital, so there is no reason for massive movements to occur. Big guys make decision based, mostly, on fundamental information - small guys don’t have to do that. Big guys must buy newest and best performing PC systems every few months, while small guys don’t have. Big guys must pay massive salaries to all those cleaver guys working for them - small guys don’t have to fork out fat pay-cheques at the end of every month.

Even though big guys have big advantage, they still have more than few disadvantages stacked against them. So, don’t worry what institutional trades are saying and simply go and find a way to attack them when they are the weakest. And then, just take portion of their money.

Many wars were won by smaller and less equipped armies and numerous underdogs won in sporting events when nobody gave them a smallest chance of winning.

It was done, it is done daily and it will be done as long as we are around.

Trade with trend.

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