With the advent of computerized trading and especially since 2007, automated traders have been a mainstay in the market. Yet there are plenty of traders out there who don’t really understand what the other side does. Here’s the quick and dirty on the difference between hand traders and automated traders; and yes, these are complete generalizations, so save your angry emails:
Don’t get us wrong – hand traders have lots to learn if they want to do well. But they don’t learn their craft in an institution. A proliferation of educational trading services have sprung up in the last decade, but many of the best hand traders remain self-taught, from the school of hard knocks and hard trades.
Conversely, automatic traders are usually highly educated. Because they’re literally operating some of the most complex financial systems ever created, they need sound knowledge of math, finance, and even quantum physics. That’s why these traders hail from Ivy League schools, MIT, and elite institutions – often graduating near the top of their classes. Our own Ezra Rapoport boasts an SB degree in Electrical Engineering, with a special focus in Artificial Intelligence, from Harvard.
While automated trading is an elite world, don’t think a lack of formal education takes you out of the running. As Scott Patterson highlights in Dark Pools, algorithmic wunderkind Joshua Levine was a high-school dropout.
He’s also a prodigy though, so don’t get too excited.
Hand traders are in the trenches each day, scanning charts and using price action, order flow, candlesticks, technical analysis, fundamental analysis, seat-of-their-pants analysis – whatever tools they can get their hands on and their minds around. They want to manually enter their trading vehicle low and sell it high, using only their know-how and personal market analysis, and their comparatively simple tools at hand.
Automatic traders are the trenches each day, acting like market makers, and working primarily to capture non-directional moves over and over (and over) again. They develop complex algorithms that take advantage of big moves from big players who are looking to off-load their risk. They’ve mastered the art of extracting profits and limiting exposure as much as possible.
Since hand traders rely only on their own trading abilities, they guide their action with rules of thumb – they jump when a moving average crosses another, when price rises above a certain level, when volume comes in. Automatic traders have to be much more precise, combing through pages of configuration files before implementing their strategies.
The gulf between the psychology of hand trading versus automated trading is huge. Lucci, our top hand trader, is decidedly button-down and emotion-up. It’s hard (maybe inhuman?) not to respond to traditional trading emotionally. Trading is frustrating, and markets are erratic.
For automated traders, all decisions are made ahead of time – their trades are basically predetermined, which reduces emotion. Their daily job is to make sure their algos are performing, and to adjust their strategies when they’re not. Temperatures might get heated if there’s an operational issue beyond their control, but they have redundancies in place to minimize that, too. Intraday, automated traders stay pretty level-headed.
So while Lucci feels good when he makes big trades, Ezra says he derives his greatest pleasure from seeing his algos and strategies executing correctly. Following his P&L minute-by-minute is actually counterproductive.
Like anything in this world, there are geniuses, morons, and everything in-between making use of both approaches; if you’re using one approach, it can be helpful to consider how you’d go about the other. The common denominator is undoubtedly that if you’re not constantly doing your research and putting in the hours, you’re going to get smoked!
Don’t miss hearing from human trader and resident options fanatic Bryan Wiener Today at 4:30 ET!
(Image credit: ASG Park)
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