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What do retail traders, hedge funds, CTAs, and investment banks have in common? For sure each of them must have a competitive advantage to be able to earn on the markets... but do they use similar approaches and methods? And what are the advantages and disadvantages of each? In this article we are finally going to clarify it...
Hi guys. Hi from Andrea Unger.
Normally who approaches trading, imagines it as a well-defined world where everything is done in a similar way.
This is really far from the truth.
In the world of trading you have a number of different players: retail traders, such as I am, banks, funds, CTA, family office and, and, and...
So it's useful, in my opinion, to give you an overview of some of these to understand what the differences are depending on who you are, what you can expect and how you actually work, which means you trade.
More than me, I think that my partner, who has been in the trading world in different positions, so not just as a retail trader as I am, can give you this overview, because he has a deeper knowledge than I have on this world.
Francesco Placci is the guy I am mentioning, he will tell you something more about the trading world.
Hi, guys hi from Francesco Placci.
As Andrea has already mentioned, there are several different approaches to trading.
How do you make money from trading?
However, before we begin, I would like to point out one important thing: in my opinion, you cannot earn with trading unless you have an edge, a statistical advantage!
We need to have probabilities in our favor, like a casino.
Too often, for instance, we hear about psychology in trading or position sizing methods, such as martingale anti-martingale, Kelly's formula, and so on.
However, although it's true that psychology plays a major role in trading, it is also true that it is definitely not enough to make money.
At the same time, money management methods are crucial, as they can allow us to maximize the profits.
However even these aspects alone are not enough to be profitable in trading, it would be like saying that by casually working, like when we throw the dices if we effectively apply the position sizing we might even profit.
It will be great if a mathematical formula were enough to make everyone rich, but it has been repeatedly shown that it is impossible to get what we hope for unless we have a real advantage.
In addition, position sizing is extremely delicate and if not applied correctly it can turn a profitable system into a system that loses money.
I'm referring for example to one of Andrea Unger's previous videos in which he talked precisely about this.
So I say this again, both the psychological aspect and money management techniques, play a major role, but they are not enough to be successful in trading.
To be able to earn you need to have an edge that is, as said, a competitive advantage in the market.
By what means can we make money from trading?
This means that you need a working method, I could mention the Unger method as we collaborate, but in reality, any measurable method works, as long as it allows us to identify some patterns, some repetitive behaviors, we can take advantage of.
On the other hand, if you work in a discretional way, you should be able to carry out a market analysis that allows for market forecasting.
Having said that it is also fundamental to take size into account because we need to be able to exploit it as traders.
Obviously, an edge that is too small will disappear due to operating costs because as retail traders, we have to bear costs that are certainly higher than those of institutional investors, who are instead able to exploit even very small edges, for example using arbitrage techniques or hi-frequency trading.
Unfortunately, this is generally impossible for retail traders like us due to the means that are available to us.
However, although in a different way, private traders like us have some advantages over large financial institutions.
As a matter of fact, we can trade the illiquid markets as our positions are not large enough to affect market movements.
Financial institutions that move large capitals generally avoid working on illiquid markets.
This is due to both the little profits they will make and they need to move larger counter values on such markets.
The different types of approach to trading
As I have already said, there are different approaches to trading which can be sorted into different categories according to the subject who implements them.
On the one hand, there are large institutions such as Hedge Funds, large business banks, CTAs, family office, the world of funds, professional traders, or prop traders, who move large capitals.
On the other hand, there are retail traders like us.
First of all, I would like to point out that there is no such thing as a unique approach to trading that is based on the subject who implements it.
Not all Hedge Funds trade the same way and not all business banks or family offices use the same method.
Typically hedge funds use rather advanced trading techniques, but not always, such as a particularly sophisticated algorithmic trading technique, for example, able to exploit the flow of the markets, econometric analysis, option or volatility trading, and arbitrage techniques.
As for banks, it is necessary to draw a distinction: actually, there is both a real trading Department and what is technically called Treasury.
So how does this work?
Basically, the Treasury of a Bank deals with refinancing operations.
In short, it manages the liquidity of the bank to cope with its signature activity.
The Treasury of a bank trades in a way that is very different from ours.
They mainly work on the money market and government bonds.
They also work on the currency market and on interest rates for edging purposes mainly.
There are some large business banks that have special trading divisions.
Based on my experience over the past few years there has been a remarkable decrease in the trading activity of Italian banks, so much so that has now become a residual activity.
Most transactions are on government bonds, however, there are also some on the stock market in order to invest their own capital.
Do banks have any secrets for trading?
There is nothing secret about their methods and techniques.
Actually, it often happens that some banks make their employees study with us.
However dealing with complex structures like banks, is usually a hassle in terms of cutting through the red tape when it comes to getting authorizations.
Conversely abroad, especially in the US, over the years, big business banks have developed some highly sophisticated desks that specialize in trading.
So there are traders who have some autonomy when it comes to amounts and asset classes.
More often than not there are teams that specialize in specific markets, namely stocks, energy, volatility, so on and so forth, which then decide the best way to work, based on their studies and analysis in line with the autonomy that they have been entrusted with.
The point is that there is no single method.
Instead, there are many different methods that depend on the reference market, the carried-out strategies, and the developed strategies.
Therefore there is no "A method" but there are several different approaches.
Thanks to the immense resources made available to them, such as highly specialized traders, large economic resources, and cutting-edge infrastructures, such as expensive Bloomberg platforms and the proprietary software, these institutions certainly have a competitive advantage over retail traders like us.
I'm talking about data, speed, commissions, processing capacity.
In this regard, this is an uneven fight because as private traders, we cannot even think of competing with financial institutions of the caliber of JP Morgan, Goldman Sachs, or Deutsche Bank.
Well, perhaps we could compete with the Deutsche Bank actually, given the bad trading results it has achieved over the years to the point that at the international level, it has turned into an issue or even a ticking bomb.
Why can't I compete as a retail trader? And what advantages do I have?
Besides the fact that there is not a single trading method, the means that are available to retail traders are completely different than those made available to the banks, so we'd better pursue realistic goals.
I will sound absolutely ridiculous if I told you that I am able to explain and teach you the algorithmic trading method the Goldman Sachs uses.
First, because there is no such a thing as a Goldman Sachs method, and secondly because even if it existed, it would require infrastructures that are certainly beyond our reach.
What advantage do we have as retail traders?
Well, we certainly have the flexibility of action that is not available to institutional investors, who have to move important capitals.
We can afford to enter and exit the market quite quickly, something that is not as easy as it sounds for funds, for example, whose transactions generally last much longer.
In a certain sense, we can say that we can also afford the luxury of choosing which time frame to trade.
For instance, we can work in the short term if we want to, whereas this is definitely much more complicated for larger financial institutions.
But there is more to it than that.
As I have previously mentioned, our flexibility of action allows us to work even scarcely liquid markets, which among other things, often show interesting inefficiencies without the fear of having to compete with professionals, as low liquidity is an obstacle for them.
For example, a bull bias on orange juice is okay for retail traders like us, but not for Hedge funds.
What is the moral of the story?
Retail traders don't need to pay fees to third parties, in fact, their performances do not differ that much from ours as their performances, from the last few years, clearly show.
I dare you to find some that have systematically beaten the market.
In conclusion...Andrea's opinion
So guys, obviously this is just an overview, just an idea of what's out there, but I think it's useful to understand that if you hear something about hedge fund performance or prop trading, it's not exactly what you can necessarily replicate or expect to replicate on your own at home.
So if you have no interest in trading and you just want to let somebody else manage your money, you will pay fees to these institutions, and that's fine, it's perfectly fine.
If you decide to do it on your own, you will save those fees but you will pay another kind of fees, which is your time.
Your time which is not a short time probably, but your time and your efforts to learn, what's necessary to learn to become a trader.
This takes time and it takes passion, you have to be committed, to be passionate about that, because if not it is better that you pay the fees to the banks or whoever to manage your money, it's really like that, because you need passion.
So if you want to dedicate this time, if you want to learn something more, here below you find a link, you can register to know something more, this is free, something more about trading done in the way I do it, done in the way retail traders can do it.
This is for you.
If you are not animated by the thrill of doing it, but only the idea you want a lot of money, probably you are in the wrong place, or at least you are in the wrong place talking to me because I underlined once more that passion is what you need to go ahead.
Trading is hard and only if you're passionate you can go further when you find some hurdles.
That's it guys, see you next time.
Ciao from Andrea Unger
Need More Help? Book Your FREE Strategy Session With Our Team Today!
We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.BOOK YOUR FREE STRATEGY SESSION NOW >>
Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.
My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.
After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.
Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.