It is a matter of fighting the fights that you can win
One of the things many retail traders complain about is the influence of algorithmic (or algo) traders on the market and their trading.
As is typical with retail traders, the algos always seem to hurt them. They always are responsible for losses. Most retail traders think the deck is stacked against them and the algos.
"Damn algos" is a common comment by many. I was guilty at one point as well.
Then I started to think more about the enemy (i.e., the algos) and what they were trying to do.
To be honest, it is kind of hard to define the enemy.
Who is the algo enemy? The High Frequency Trader
Is the algo a High Frequency Trader (HFT) that is scalping the ups and downs in the market by using a computerized program, and advanced technology that makes execution easier and faster than a speeding bullet (and most/all retail traders)?
At the point of every trade is a counter party. If the HFT trader can get right next to the counter parties through a direct connection, and if they have a lot more internet speed, their trades can be executed quicker. As a result, they have an advantage of the raw power to scalp the markets.
What is a retail trader to do?
Just like you and I, are not likely to win a 100 yard dash vs. Usain Bolt, you and I will not win a sprint vs. a HFT who has "trained to run" a short distance (at a great cost) in a incredibly fast time.
Plus if you think about it, if there is a HFT buying, there may be another selling at the same time. Both could end up winning in an up and down market, but not at the same time. If the market trends away, it could go horribly wrong for one of the traders - that could be you.
Most "professional" (i.e. Usain Bolts) HFT could just throw more trades, throw more capital at the losing trends and simply ignore the losers until the market eventually returns. They may have filters to stop and start trading given certain parameters that kick in. But they also keep the "program" going 24 hours a day, every day. True HFT traders who apply lots of resources and capital, have the ability to run the races each and every day with pretty consistent result.
Do you have the ability and resources to do all of that 24 hours a day?
Not likely. You and I just don't have the pedigree to be the "Best at Show" in this type of competition. But don't let it bother you. Look for another way you can compete.
Can you compete against the Algo trader that applies an algorithm to pockets of volume?
The next type of algo trader is the HFT who will apply some "algorithm" to the buy and sell data.
For example, a program might be designed by a HFT to find pockets of volume that enter the market from the buy or sell side. This is more doable in the stock market where volume flows can be seen (outside the dark pools of course).
That type of trading is harder to do in the forex market especially for retail traders. Banks, larger traders with "contacts", and brokers may have an advantage of seeing more of the volume and where it is happening in real time.
Knowing that volume and where it is happening in real time, gives them opportunities to profit from that knowledge.
Of course there are rules of "front running" those orders, but quite frankly it is hard to police> In addition, they may be able to piggyback the orders too.
Can you as a retail trader do that?
Again, there is not a lot you (or I) can do. If you can't do something, don't sweat it. It is simply part of the game. In any athletic game, there are things beyond your control. The best teams/athletes deal with it and find where they an play, compete and have an advantage.
Algo traders that use technical tools. Can you compete with them?
Another kind of algo trading is the use of trading tools like technicals. Traders have always tried to use technical tools as a way to determine a swing in the bullish or bearish bias. Trade above is more bullish. Trade below is more bearish.
I like to think of this type of algo trading, as the act of finding a definitive place where traders will tend to gather.
If traders all gather at a spot/area, there tends to be a reaction. That reaction brings volume and a movement away frpm that area. If you know, the price will move away, that is an advantage to you and your trading.
Think of it as a some scientific lab experiment where if you add XYZ to ABC , there will be a chemical reaction. The beaker will boil over or even explode.
The same thing happens in trading.
If you know that in a normal market, there will be a reaction when this situation exists, you as a trader can take advantage of that "market reaction" (i.e. move).
The question is "What ingredients cause this market reaction to happen?" Where will the reactions be that bring the crowds of traders? That bring the volume? That moves the market away - either higher or lower?
For me, it is a technical levels that use technical tools that lots of traders (i.e.., algo traders) will use, see, and react to.
For example, the GBPUSD price chart above shows 6 separate swing level around the 1.32895 level. It all started back on June 25th and 26th (see red circles 1,2 and 3), when a clear ceiling was established. The price moved lower away from that ceiling.
Fast forward to July 6th when the price stalled at the level on the first test.
Today (July 9th) the price broke above on the opening, stalled near the level in early Asian trading. Later in the London session, the price stalled against the level twice, before moving to the high for the day at 1.33615.
With 6 red numbered circles all around the same area at 1.32895, that area becomes a "algo area" where a large amount of traders (with volume) could be expected to enter on a test or a break.
Does a retail trader have the ability to see that area, easily?
Can the retail trader take advantage of that algo area where sell orders kick in on a break below?
Now, if the "kick through" the 1.32895 area is a fundamental report like Boris Johnson resigns from the PM May's cabinet. If you know that too (because you read FXL), you are not only joining the algo's (who just look at the technical tools), but you are also adding a fundamental layer that increases your confidence on the break and increases your chance for a profit.
Does it take "work"?
Is it hard work?
No. If you are not willing to do that, you are not ready to trade.
The reward is that combination (technical and fundamental) can be powerful to you as a retail trader, and put you ahead of the pure algo trader too.
And you thought you had no way to compete vs the algos. ; )
Now moving forward, a sell on the break of the 1.32895 level can lead to another algo level. In the chart above that comes in at the combination of the trend line at 1.3245, the 38.2% at 1.32422 and the 100 hour MA.at 1.3238.
Not surprisingly, the crowds gathered at that 1.3238-45 area. There was a bounce up to 1.3268 off the algo area that uses technical tools.
You as an algo trader could play the levels just like a pure algo trader.
You might also apply your technical trading acumen, along with your fundamental acumen, to squeeze more from the combination. In fact, the algo area has since been broken and trades down to the 200 hour MA (another algo area) of interest (see green line in the chart below).
You can be an algo trader and more
Can you the lowly retail trader play the algo game and not only compete, but win?
It is a simply a matter of recognizing your weaknesses and strengths and using your strengths to win.
Remember, you don't need to be the best at everything in your trading, and there are certain things that most retail traders can simply not do and compete - especially against some of the things the algos/HFT do. That is just a fact of trading.
However, if you look close enough and find those situations where you can join the algos - and maybe add your own value added - you can not only compete, you can win too.