Sunday, 28 February 2016

Scalping and Short Term Trading is Like Jujitsu - Using the HFTs to Profit

As these markets continue in their transition, one think looks like it will remain a permanent part of trading: the algo. There's algos and there's HFTs. While a retail trader can't be an effective HFT, we can use algos and we do.

This leads me to Jujitsu. The Wikipedia here says:
Jujutsu (/ˈts/ joo-JOOT-soo; Japanese: 柔術, jūjutsu About this sound listen ) is a Japanese martial art and a method of close combat for defeating an armed and armored opponent in which one uses no weapon or only a short weapon.[1][2]"" can be translated to mean "gentle, soft, supple, flexible, pliable, or yielding." "Jutsu" can be translated to mean "art" or "technique" and represents manipulating the opponent's force against himself rather than confronting it with one's own force.[1] Jujutsu developed to combat the samurai of feudal Japan as a method for defeating an armed and armored opponent in which one uses no weapon, or only a short weapon.[3] Because striking against an armored opponent proved ineffective, practitioners learned that the most efficient methods for neutralizing an enemy took the form of pins, joint locks, and throws. These techniques were developed around the principle of using an attacker's energy against him, rather than directly opposing it.[4]

The part of the quote printed in bold above was emboldened by me to highlight the main idea I'm talking about: "use an attacker's (HFT's) energy against him.

In previous posts I've talked about seeing the order flow. Its something that has been the focus of this blog since its beginning in what seems a lifetime ago now, October 2009.

On the floor our function was to take the other side of the trade of the "paper". We were liquidity providers. However, where we differed from market makers was that we only took the other side of trades that we wanted to take. So if, say, we identified a broker coming in with what looked like a big buy order, the smart thing to do was to sell him the last 100 contracts. In addition, we may have also front run his order, buying ahead of his big order and selling to him as he filled his order pushing price in our favour.

No more floor locals.

But we have something now that we didn't have then. We can count the volume contract by contract and see whether the buyers or the sellers were more anxious.

The nub of all this is how to use the technology we have now to trade the way we did on the floor. We had an enormous edge on the floor and this edge is here now, using the right technology and the right strategy.

Traders are looking for a way to use a relatively low amount of capital with limited risk per trade and the ability to make a living trading small size. "Using an attacker's energy against him" is the way to do it.

More to come on this subject.

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