Retail Stock Trading Is Dying Due To Low Volatility

The low volatility phenomenon in the equity markets is the result of explosive growth in passive investing after a prolonged and continuing central bank manipulation of prices in conjunction with a decline in retail trader population. It is hard for traders to compete in a market that lacks an unbiased price discovery mechanism.

The low volatility phenomenon will persist until there is a significant correction. Historically, volatility increases along large corrections and bear markets and peaks at bottoms, as shown in the SPY chart below.

This is how Prof. Derman responded to my reply to his tweet about low volatility becoming an asset class.

Despite a harsh environment for equity trading, some quantitative methods still work relatively well. In a recent article we presented the results of a survey of a few expert users of our machine learning software around the world and how they deal with this low volatility phenomenon.

Many traders have already left equity markets and are competing in forex and futures. This trend will continue since it appears that central banks are involved in massive manipulation of equity prices and technical trading performance has been adversely impacted by this. It is hard to compete with market participants that have virtually unlimited capital. Technical indicators are rendered useless one after the other in last few years. Classical chart analysis has stopped working long ago. In a few years and due to the noise, it will be impossible to identify a profitable trading strategy in backtests apart from over-fitted ones.

Note that futures and forex are harsh environments for traders because they have been designed for the benefit of market makers and exchanges. We will not be switching to these markets for now since our machine learning software is still capable of identifying key turning points and viable strategies in equity markets. But we will abandon equities if we have indications that the equity markets provide no more opportunity to traders but only to investors. Our methodology is also applicable to other markets where there is still price discovery and actually in some cases it is more effective since there are unexploited price anomalies.

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Charting and backtesting program: Amibroker


Technical and quantitative analysis of Dow-30 stocks and 30 popular ETFs is included in our Weekly Premium Report. Market signals for longer-term traders are offered by our premium Market Signals service. Mean-reversion signals for short-term SPY traders are provided in our Mean Reversion report.

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