Wednesday, 30 March 2011

Trading Against the 'Bots

During my enforced distance from the markets, I've been holed up in my bed with my iPad surfing the net. There are lots of people in the trading world complaining they can't make money anymore. Yet, I'm having the best of times and both readers and students seem to be hitting sixes (if you play cricket) or out of the park (if you're a baseball fan).

Most of the complaints involve a whinge against high frequency trading and the 'bots of the big boys. Some of these bots not only look at market activity but are plugged into news feeds. The bots can jump on the markets when the news hits and before a human can even read the news, not to mention interpret it. A couple of links below a relevant to this.

Of course we know that everyone has their own agenda and we need to examine what has been written and not believe everything we read. However, the world and all activity is in a constant state of evolution. Was it Darwin who said that he who doesn't change, dies?

Anyway, I made my first trade in about 1964. I remember the trade - I bought 100 shares in a boat builder called "Brooker" making 16%. Ever since then the markets and how they are traded have evolved- from reading prices in newspapers, to using quotemasters (looked like a huge calculator), to downloading daily data from CSI in Boca Raton, to using 5 minute intra-day data, to tick charts, to range bars, to HFT. We have had to evolve to survive. The current trading at the speed of thought is no different. It's just another revolution of evolution.

The market is the market and price is the result of the activity of buyers and sellers. This has always been and always will be the case. The fact that the speed of activity is hyper does not change that. All it means is that our technique must change to compete.

It seems to me that there are two main choices. One is to move to a much higher time frame to avoid the hyper activity, and the other is to move to a lower time frame to get closer to it. If we move to a higher time frame then the capital requirements increase dramatically, as both our holding time and out stop loss must increase. It's also a lot harder to see where the market is going in the next few hours or days than it is to decipher where it is going in the next minutes, at least it is for me.

So the solution for me is to get closer to the action. I have done this by reducing the periodicity of my range bars and by using a 'bot to be able to react more quickly and consistently to market action.

Being a believer that discretionary trading is the ultimate way to trade,  I isolated the issues. Finding and executing the optimum entries resolves the issues of being too slow or not being skilled enough.Pprogramming some trade management rules while still allowing discretionary trade management resolves the main issue: a tested, pre-qualified trading methodology.

So the answer to trading against the 'bots? If you can't beat them, join them!

Today's chart of the Euro future shows how Flo nailed the entries. Managing the trades was easy. Whether you want to run the sequence and trade every peak and trough or whether you want to run the sequence scaling out, it can be done manually or by the 'bot. I'm still not fully over my flu so I left it mostly to Flo, unless I noticed something I really couldn't stand. The arrows are Flo's.

1 comment:

  1. How do you manage the third from the last trade? Do you stop out, double down, exit some number of contract and lighten the position?