Why should you be able to make money?

This is an obvious issue, but one that is often ignored. The argument of many academics is that you can’t make money trading; your best bet is to put your money in a diversified fund and reap the baseline drift compounded over many years. (For most investors, this is not a bad plan for at least a portion of their portfolios.) Even large, professionally managed funds have a very difficult time beating the market, so why should you be able to do so, sitting at home or in your office without any competitive or informational advantage? You are certainly not the best-capitalized player in the arena, and, in a field that attracts some of the best and brightest minds in the world, you are unlikely to be the smartest. You also will not win by sheer force of will and determination. Even if you work harder than nearly anyone else, a well-capitalized firm could hire 20 of you and that is what you are competing against. What room is there for the small, individual trader to make profits in the market?

The answer, I think, is simple but profound: you can make money because you are not playing the same game as these other players. One reason the very large funds have trouble beating the market is that they are so large that they are the market. Many of these firms are happy to scrape out a few incremental basis points on a relative basis, and they do so through a number of specialized strategies. This is probably not how you intend to trade. You probably cannot compete with large institutions on fundamental work. You probably cannot compete with HFTs and automated trading programs on speed, nor can you compete with the quant firms that hire armies of Ph.D.s to scour every conceivable relationship between markets. This is all true, but you also do not have the same restrictions that many of these firms do: you are not mandated to have any exposures at any time. If you are uncomfortable with the market environment, you can sit fully in cash for weeks at a time and no manager or investor is going to complain. In most markets, you will likely experience few, if any, liquidity or size issues; your orders will have a minimal (but still very real) impact on prices. Most small traders can be opportunistic. If you have the skills, you can move freely among currencies, equities, futures, and options, using outright or spread strategies as appropriate. Few institutional investors enjoy these freedoms. Last, and perhaps most significantly, you are free to target a time frame that is not interesting to many institutions and not accessible to some.

One solution is to focus on the three-day to two-week swings, as many swing traders do. First, this steps up out of the noise created by the HFTs and algos. Why compete with a machine on its own terms? Similarly, many of the largest and best-capitalized funds actually cannot participate in this time frame because their position sizes are too large. They may enter and exit positions over multiple weeks; your profits and losses over a few days are inconsequential to them. Rather than compete directly, play a different game. As Sun Tzu wrote in the Art of War: “Tactics are like unto water; for water in its natural state runs away from high places and hastens downward … avoid what is strong and strike at what is weak.”

(From the first chapter of my book, The Art & Science of Technical Analysis)


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 8 Comments

  1. Marcus Colone

    The only thing you need to understand to trade any market profitably is auction theory. Period.

    Sorry but time frame is not edge.

    Market location is edge.

    Know what prices are important to your market and trade around them. This is what large traders/institutions do.

    You want to TRADE WITH THEM. Not compete with them.


    Meaning that you must rely on larger, more capitalized traders to step in and pay worse prices than you did.

    1. Adam Grimes

      Auction theory is a bit ill-defined, at least in application. For instance, telling someone “The only thing you need to understand to trade any market profitably is auction theory. Period.” gives them nothing they can directly apply.

      The approach you are discussion does offer one possible edge, but not nearly the best edge I’ve found in my work…. and be careful with absolute proclamations. Very few of those are as absolute as we think.

      Also, there are many means to that end.

  2. Garyr

    gr8 article, makes total sense

  3. Jack

    The insight in this post is profound.
    Besides, what can let you make money is not even your absolute skills, it your relative skills. The Alpha of large funds is diminishing because they are compete at the same time frame and their skill levels became so closed recently.
    But sometimes, it is so hard to admit that you cannot make money or are unhappy trading in one specific time frame such as day-trading even you know the chance is small. Doing so needs both insight (know the market and yourself) and courage (overcome your self-esteem).

  4. irdoj75

    Thanks, very nice. I copied+pasted most of this into my “business plan”.
    I would not see this as playing against other players, but more like running a marathon. Your goal will probably not be to win the race, but to finish and/or achieve a certain time o be above average in your peer group (age, time etc.).
    So I am not going to be the best trader in the world, but trying to be as a first goal above average, i.e. beating the “baseline drift”, then as a second goal being better than yesterday etc. In the end it is a game you are playing alone against yourself…
    (I am personally not running a marathon, as I see no point to run with thousands of others in a race against myself… 😉 )

  5. Jake

    can you change the font color to black, it is very hard to read this light gray text on a white background.

    1. Adam Grimes

      Check your monitor settings. I don’t think the font is pure black, but it’s a very dark gray. (Might even be black.)

  6. Guest

    been a fan of your blog since I discovered you from abnormal returns ‘top clicks’, though I am into short term trading learning for quite a while, I like this post of yours, it keeps me motivated further to pursue my education in trading, hoping/planning someday I can have the capital to start, keep it up…

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