Large institutions like FIIs, mutual funds, hedge funds etc. have many advantages against individual, retail traders. For example they use sophisticated software; they employ highly educated people for their trading desks, they get very low brokerage rates from their brokers.
But individual retail traders also have their own edges against these big institutions!
1. Retail traders don’t trade huge sizes so they need not worry about their own order volume impacting the price action while for large institutions it’s like a large elephant that cannot help but increase and decrease the water level of a pool when it enters and exits.
2. Retail traders can sit freely even for days if they don’t find an opportunity but can a large institution let its traders sit idle after spending so much in maintenance and salaries?
3. Due to the competition among them to attract funds, large institutions are under much more pressure to get higher returns.
With the advent of technology even small retail traders have got access to real time tick by tick charting/technical analysis software which has democratized the trading business. Although large institution may have proprietary codes or more indicators but for traders the most important information is the “price” to which both type of traders have similar access.
So crux of the matter is that in the business of trading, despite the existence of large institutions, small traders do have chances of success if they use their edges properly. So when those stories of rough traders who have lost billions for their institutes come out I think that it’s better to be a small fish than to be the “London Whale”.
[Contributed by Jitender Yadav. Thanks, Jitender for this excellent post]