The banks, hedge funds, and institutional investors play an essential role in the financial market. They usually hire the top personnel, offer the best training and employ sophisticated algorithms and computer-aided evaluation. How can a small trader compete with these institutions and actually beat the market and generate money through day trading?
Banks and Institutions Performs Poorly in Trading
The financial markets have progressed a lot to make the trading of currencies, goods, and other assets a lot easier. This is done for practical purposes and to make the trading more profitable.
To have a clear view about this, here’s an example – The foreign exchange market changed because some countries required trading goods and services, while the futures market evolved due to the need for price stability in the inconsistent commodities market. Those who are into this type of trading are not conscious of getting the best price possible as a result they trade inefficiently.
Many trades in the market are done because of practical reasons and thus they perform poorly. This is where traders take advantage of the situation.
Exchanging Currency while Traveling is Trading
A simple example of trading is when you visit a foreign country. If you go to another country with a different currency, most of the time you will not use a local exchange shop to exchange currency – this is a simple form of trading.
These shops usually offer bad exchange rates, but you do not care at all and proceed in exchanging your money at the lowest rate. Because you are too excited, you exchange money without even checking the exchange rate. As a result, the exchange shop profits a lot.
This sort of trading does not only take place in the said situation, even in institutions like banks and corporations it does happen they trade for practical reasons – purchasing materials from another country for example. The value traded can be big and thus it affects the market price, giving opportunities for speculative traders to earn.
Some examples of inefficiencies in trading are as follows:
Trading as Part of the Actual Economy
Foreign exchange market requires trading in doing business. For instance, if a business in Europe buys goods from the US, they will have to exchange their local currency into US monetary in order to do so. When the amount of currency being exchange is huge the need for the US dollar increases thus the exchange rate changes.
These companies are not focusing on the possible profit, or trading could take place. The only thing that matters to them is that they need to exchange currency in order to do business.
Trading for Corporate Reasons
There are several situations where trading is done for corporate reasons. For instance, if there are negative rumors spreading about a particular company, the manager of an investment fund might sell the stock they own. They decide to sell the stock without confirming first whether the rumor is true or not. If in case the rumors are not real and they did not take any action, they might lose their job.
A trader taking the needed action on their account will not experience the same issue.
Trading for Political Reasons
In times of economic turmoil, an independent trader can continue trading, because the price changes may take place, which may lead to the significant movement of the markets.
As a result of economic turmoil, bond yields, currency markets, and the stock may become unstable. The price may fluctuate even more as the investors search for safe havens in currencies, like the Swiss franc or the Japanese yen, which makes doing business with other countries quite expensive. Central banks or state-run as a whole purchase asset to help stabilize the markets that caused the prices change significantly.
There are lots of opportunities for an independent trader during these interventions.
Trading for Emotional Reasons
Irrational and emotional reasons are usually triggered by news and reports that may affect the market sentiment and affect the price significantly. The market sentiment being reported by the media may lead to emotional trading, which will result in more news coverage by the media – the news and the markets penetrate into a vicious circle that may lead to erratic trading and high volatility in the industry. An independent trader can take advantage of this and wait for the right time to earn.
Traders can generate profits by taking advantage of the inefficiencies mentioned above that are made when trading is done for reasons other than profit. Thus, most of the trading in the financial markets is done for speculative reasons, so a trader will not just look for an opportunity to exploit the market inefficiencies but likewise compete with other speculative traders who have only one thing in mind, to profit. In short, speculative traders likewise trade against each other. If a trader learns to predict or anticipate how other speculative traders will perform in particular situations, they can take advantage from it by using this knowledge into their trading strategy. Most of the time, they apply this in technical evaluation, where a trader follows some indicators, not because they think it is working, but because they think that all speculative traders consider them when trading. Therefore, a speculative trader can generate money by taking advantage of the inefficient trades and at the same time one step ahead of their competitors.
We are aware that a part of trading is done for reasons aside from profit, and speculative traders can benefit from this by taking advantage of the inefficiencies. Likewise, if a speculative trader can be able to predict or anticipate other speculative trader’s strategies they can be ahead of them.
With the above-mentioned factors, it is possible for a trader to succeed and beat the market. But a trader needs to have an effective strategy, discipline, and good money management. Our main objective is to help traders learn the best way to succeed in trading and support them along the way.