With an impressive range of digital accessories now available on broker platforms, Kevin Rose examines the evolution of predictive trading systems
The past ten years have seen an explosion in the number of tools available to retail traders. Previously, traders would require a Bloomberg or Reuters terminal, at a cost of thousands of pounds a month, to gain access to the real-time price information necessary to make effective trades.
Now, retail traders have a plethora of options at their fingertips, with no perceived disadvantage to an institutional trader.
“Today, retail traders can utilise a wide range of both browser-based and downloadable trading platforms which contain a vast array of tools and resources to help them to maximise their trading potential, all as standard features of their trading accounts,” says Joshua Raymond, chief market strategist at City Index.
His firm’s clients can analyse the markets with more than 100 technical indicators, access real-time breaking news, and also take advantage of auto-trading technology and strategy builders which place live trades using price signals automatically triggered by specific conditions that they set themselves, without the trader needing to be in front of a computer screen.
“The next wave of trading platforms is certainly offering more sophisticated functionality,” says Craig Inglis, co-head of product development for CMC Markets. “They are not just a method to execute trades any more, they also enable the user to scan for new opportunities across thousands of global products in an efficient manner.”
An algorithm places entries and exits automatically while monitoring the market 24 hours a day
CMC Markets designed its latest platform with advanced features, such as price pattern recognition, which a retail audience of active and professional clients needed.
“In the institutional space, these features just had to produce results and it didn’t matter how easy – or difficult – it was to get there; whereas retail platforms need to take that complexity and make it work for the individual,” says Mr Inglis.
A number of retail platforms are now offering price pattern recognition technology. This functionality can scan multiple products, across different periods in a very short timeframe, to identify technical trading opportunities almost as they happen. This technology is the latest retail advance based on institutional capabilities.
“Our pattern recognition scanner identifies up to 40,000 technical trade set-ups each month, which is physically impossible to do manually by yourself,” says Mr Inglis.
“Clients don’t need to worry that they might miss the latest technical opportunity because of fast-moving markets or a lack of personal ability to identify them; these systems do all the hard work for you. However, the client will still need to do some of their own analysis before deciding to place a trade.”
He stresses that such systems do not guarantee success, but they are tools which can make the decision process easier for the individual.
“The most common way in which this is used is for candlestick recognition,” says Jeremy Gulickson, technical specialist, business development at FXCM.
“For example, an algorithm may look for a common Japanese candlestick pattern such as a Doji or a Morning Star. Rather than a trader watching several charts looking for this pattern, an algorithm automatically alerts the user when these patterns occur.”
The trader can potentially automate a strategy to trade based on this information or they can use it as an alert to make a decision afterwards.
The past few years have seen growth in popularity of “robots” or “expert advisers”. These allow the trader to add a piece of software to their platform, usually based around the MetaTrader 4 system.
“Auto-trading has become very popular in recent years. This is when an algorithm places entries and exits automatically while monitoring the market 24 hours a day,” says Mr Gulickson. “Major positives include removing emotion when trading and the ability to manage traders 24/5.”
James Hughes, chief market analyst at Alpari UK, observes: “There tends to be two camps where robot trading is concerned. On one side are people who love the idea of letting the software do the work and making money for you. However, the other side prefers to be in control and would rather do it all themselves.
“I would always be in the second camp, but I would be foolish not to recognise that the expert adviser is now a really fast-paced and booming part of the retail trader’s arsenal.”
From niche to mainstream
The UK retail trading and spreadbetting market dates from 1974 but, until the late-1990s, trades were transacted over the phone.
The real breakthrough came with the advent of broadband, taking the market from niche to mainstream.
For David Jones, IG Index chief market strategist, another driver for the retail trading market’s growth was the constant stream of finance stories from 2008 onwards.
“Suddenly the financial markets were front-page news, which made people a lot more aware of markets and their fluctuations,” he recalls. “It made people want to take control of their finances and investments. Almost perversely the crash helped to highlight the foreign exchange and spreadbetting sector.”
Since then, the major players have moved into the mobile arena, and offer dedicated smartphone and tablet PC live trading applications, which in many cases are more powerful than the tools institutional traders had at their disposal five years ago.