8 Incredible Facts That Could Make HFT Your Best Trading PAL
The trading world has changed dramatically over the last decade and it may be time for you to adapt your trading style to this reality. Here are 7 sound reasons why you should consider incorporating order flow information into your trading strategies.
Professional Trading Algorithms Have Very Big Brains
Let’s face it, the top HFT and quant firms maintain significant benches of PhD's and computer programming whizzes.
Reality Check 01 | You are not going to write trading algorithms that are smarter than those being produced by the top HFT players.
Algo Trading Has Become A Great Arms Race
As Michael Lewis demonstrated in his book, “Flash Boys”, the high frequency trading firms are quite willing to make significant capital investments in shaving microseconds, and even nanoseconds, off of their trade execution time.
Reality Check 02 | You are not going to get your orders filled faster than the top HFT players…so working trading strategies that are contingent upon fast fills is fruitless.
More Data Means Better Information
The HFT and quant firms are looking at vast amounts of data – much more than you can bring down from the internet and process on your PC. These trading firms have access to significantly richer data sets to mine than you and this puts you at an information disadvantage. Do you envision that these firms are using this information advantage against you?
Reality Check 03 | To execute in the same markets as the HFT players you will need access to better information than you are currently using.
Deeper Pockets – Better Risk Algos
Risk management is whole lot easier when you are highly capitalized. Risk management is even easier when you have a suite of algorithms constantly monitoring your positions and adjusting your trade risk automatically.
Reality Check 04 | Most traders don’t get into trouble because they have less than optimal risk management methods, they get into trouble because they don’t strictly adhere to their risk management methods. Instead of cost averaging or stopping out they double-down on losers and hold them too long.
HFT and algorithmic trading firms look for steady wins – they don’t swing for the fences. Their models detect very high probability setups and their trade execution algorithms manage these opportunities accordingly. In and out and in and out. They are always incrementally increasing their profits and moving on to the next trade.
Reality Check 05 | Many traders find themselves into trouble when morph a short-term losing trade into a longer term ‘wait and see and hope’ trade.
If you have done this in your trading you may want to take a hint from the quants and look for consistent, yet small steady wins. Cash flow is the goal not overnight riches.
HFT trades are executed using strictly programmatically generated orders. There is no second guessing, no missed information because they took a phone call or got drowsy. The trading bots are not ‘ruthless’, they just don’t have any emotions.
Reality Check 06 | The HFT bots know what they are doing. If they are doing something, they are doing it for a well researched reason. Do you think that if they are doing something, it might behoove you to be aware of, and perhaps piggy-back their activities?
The Counter-Party to Your Trade is Not Your Friend
It is unlikely that the counter-party to most of your trades is a retail day trader, or a pension fund buying long term investments for the hardworking school teachers, police, and firefighters of the world.
It is more likely that the counter-party to your trades is a well informed, well capitalized trading bot who knows exactly what false technical analysis signal provoked you into clicking the Buy or Sell button on your screen
Reality Check 07 | The HFT bots know what you are doing. They are watching the order book and they know when a potential supply and demand imbalance can trigger an extended pulse of Price Discovery. Do you really want to be trading against these bot or do you want to be trading alongside of them?
HFT Has Figured Out the Game For You.
The level of effort that was expended to develop and mature the electronic trading markets and the algos that dominate them is staggering.
This electronic market and algo build-out consumed some of the greatest minds of our time and the largest pools of capital in existence. It is a magnificent thing to behold. It is an effort that no one of us could even imagine accomplishing….yet the benefits of all of this work are available to those traders who are smart enough to see, and seize, this opportunity.
Reality Check 08 | Tada! Game Over. Slam Dunk. You no longer have to compete in hand to hand combat with these trading bots any longer. You can simply follow their lead. Our work has uncovered repeatable sequential patterns of order flow that coincide with price action. You, and your trading, can leverage the magnificent effort that was expended in building out today’s electronic market places.
Same Setup - Different Day
Psst....though we have not yet completed our new book, "High Frequency Tape Reading | Unraveled", it's companion offering, 'High Frequency Tape Reading | Cheat Sheet" is available for free to those who fill out this form.