Take Advantage of the Trading Machines
Stockscores.com Perspectives for the week ending March 20, 2016
In this week's issue:
In This Week's Issue:
- Stockscores' Market Minutes Video - Are You Trading Emotionally?
- Stockscores Trader Training - Take Advantage of the Trading Machines
- Stock Features of the Week - Turnarounds
Stockscores Market Minutes Video - Are You Trading Emotionally?
Emotion is the enemy of every trader, it causes us to see what we want to see and make mistakes when interpreting facts. This week, I provide a simple solution that can help you overcome emotional trading decisions. That plus my weekly market analysis. Click Here to Watch To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel.
Trader Training - Take Advantage of the Trading Machines
Computerized trading is the dominant force in the market today. More than half of daily trading volume is driven by computers. What is the difference between high frequency trading (HFT) and algorithmic trading? How does it affect investors and how can traders overcome the effects that machine based trading has on the market? Here are my thoughts.
First, let's differentiate between HFT and algorithmic trading. High frequency trading uses advantages in speed to profit. Extremely fast computers coupled with extremely fast connections between markets allows the HFT computer to take very small profits in fractions of a second. It is a game that individual investors cannot play because the resources required make the barrier to entry very high.
I believe HFT inflicts some harm on individual investors as these computer programs use their speed advantage to get better prices on trades or take away better prices from the retail investor. So often, I have attempted to buy or sell a stock or ETF at the quoted price shown only to get filled at a worse price. In the short time that it takes my order to be filled, an HFT engine has stepped in front of my trade and made a small profit off of it. I have never understood the advantage for allowing HFT but it is a profit center for stock exchanges so it exists. What bothers me most is that HFT is not something that any market participant can do because the entry costs are so high.
While I don't agree with HFT, I also know that it is not an excuse for not being able to profit from trading. The cumulative effect it has on overall trading is large but on each individual trade, quite small. I should not blame a losing trade on HFT, it has just become a cost of doing business as a trader.
Algorithmic trading uses the computer to execute a trading strategy based on automated analysis of data sources. A simple example would be to buy a stock when it's daily closing price moves above the 50 day moving average after being below it for at least 20 days. These sort of instructions can be executed quickly and without emotion by a computer but are only as good as the analyst who devised the trading strategy. Since computers are capable of handling complex calculations across a large number of stocks and their data streams, the successful algorithmic trader is able to beat the market using the computer as a tool.
From a cost perspective, algorithmic trading has a much lower barrier to entry than HFT but it does require a good deal of expertise. The most successful algorithmic trading operations often employ PhD's in math, statistics or behavioral science. However, even a retail trader can develop an algorithmic strategy with some time and effort.
I think that understanding algorithmic trading is essential to being a trader today. It has changed how I approach trading from just a few years ago. Algos often take advantage of human emotion, going against the sentiment of the crowd by shorting markets when there is euphoria and buying during times of fear.
Fortunately, we can take advantage of this by focusing our trading approach on how the computers hack our emotions rather than listening to the stream of information that flows from companies to investors through the mainstream media. How often have you seen a stock or market move contrary to the news of the day?
A trader must learn to recognize the difference between an overbought or oversold market. They need to be able to know the signs of a trend reversal and not be swayed by a short term pause in a trend.
All of these things can be understand from simple chart analysis. In the Stockscores Foundation trainer trading, I focus on the six elements of chart patterns to define trends, price channels and predictive price patterns. By keeping it simple and focusing on the message of the market, the trader can find success by approaching the market the way the computers do - taking emotions out of the trading decision.
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Stocks and markets that reverse downward trends tend to have a few phases. First, an emotional sell off. Next, a break of trend and then the formation of a rising bottom. Finally, a break from the rising bottom which will often then develop in to an upward trend.
Traders trying to pick a bottom can enter at any of these stages. Jumping in at the first stage has a low probability of success but also a higher reward potential. Waiting until the break from a rising bottom represents a good balance between reward, risk and probability for success.
This week, I ran the Abnormal Breaks and Stockscores Simple Weekly Market Scans in search of this turnaround chart pattern and found two, one on the daily interval and the other on the weekly interval.
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1. CGI
CGI broke the downward trend in February after going parabolic to the downside in January. On Friday, the stock broke through $10 resistance after trending sideways for about a month.
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2. T.DML
T.DML has been in a downward trend since early in 2014 with an acceleration of trend in the Fall of 2015. The stock stabilized over the last two months and this week made a break from that low volatility. Optimism is building and the Sentiment Stockscore has moved above 60, setting up for a good longer term trend reversal.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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