I've had the privilege of meeting and speaking with some great traders. I've been able to soak up a wealth of knowledge from our discussions ─ knowledge which can't be taught by a textbook. We've challenged each other's research and trading ideas. I've noticed one common characteristic: When they're wrong, they don't make excuses and blame the negative outcome on the market. They own their mistakes and try to determine where they miscalculated, hoping to avoid a repeat.
Many market participants and financial news networks love to blame the stock market for negative outcomes in their portfolio. They feel the market is "out to get them." The truth is, the market is not to blame. Instead, our biases and our actions are the true villain. We're our own worst enemy. Everyone is subject to biased opinions.
One comment seems to be increasingly becoming the go-to excuse: "The algorithms trigger selling, thus creating unnecessary volatility" ─ or some similar variation blaming all bad outcomes on algorithmic trading. Such comments are pure noise; they're biased interpretations. Good traders and investors don't blame their performance on algorithmic trading. They may acknowledge some difficulties in navigating the landscape, but in the end, they take responsibility for their actions.
And who's to say the volatility is unnecessary? If the stock market is one giant voting machine that considers all participants' opinions in real time, then obviously some participants thought the reaction was warranted. Also, remember that computer algorithm rules are written by humans. Who's to say it's not good risk management in action? Prudence might well tell you to cut your losses quickly. You can always repurchase, but you can't magically undo losses from stocks that have slid into the abyss.
People are also biased when they believe that algorithms are only programmed to sell. I have no issue with participants being frustrated with automated trading. However, if you want to blame the "algos" for selling, then you should also thank them for buying with fury, causing massive rallies. It goes both ways. They certainly have negative aspects, but they also add positive value. It makes for a nice excuse, but it's of little benefit to play this biased blame game.
There's a truism that was around long before algorithms began trading in and out of the markets at lightning speeds: "The market takes the escalator up and the elevator down." In other words, the sell-off is almost always faster than the slow grind upward. Markets have always been volatile. While I don't deny that markets may move faster today, we also have nonstop news that is being relayed to us at accelerating speeds. This makes us all susceptible to emotional responses to news headlines. I'm certainly not defending the "algos." In every group there will always be some bad players. However, I try to look at the big picture and realize they can help as much as they hurt.
Trading and Investing are incredibly difficult. I could say this every day of my life and it still wouldn't get the point across about how tough this business really is. I encourage those who constantly complain about algorithmic trading to spend their time studying and figuring out a solution. Go back to the drawing board and develop a strategy to beat them at their own game. This is the new normal. It's not going away. The best in the industry are those who can adapt to every possible market eventuality.
In school I was always taught to come to class prepared. It was not the teacher or the professor's fault if I forgot to study, forgot to do homework, or forgot the needed materials for class. Just as in school, come to the market prepared. If you don't do well, don't blame others. Go back and figure out a solution that will increase the probabilities for success next time. For further discussion, click here.