What an interesting session today. Came in short a healthy amount for what I usually take home overnight. The economic data this am at 8:30 made it a little uncomfortable to hold but I had my plan. Lifting and holding above 1100 on eminis I had to be flat, that was my line on the sand. Luckily there was a strong rejection to the level off the number and then I had my clue that we could trend down for the day. All I needed was confirmation of market getting below 1084 with some speed and then the real party/reversal was on.

The open was chopalicious. Partied in TNA, SPY, GE, FAS, LVS, JPM and F. The usual crack stocks I trade every day. My mentality was that we would close at lows. The tricky part was the mid day consolidation as it is the case these days with the silly hfts. Shorts certainly were feeling pain if they didn’t lighten up around 1pm when that 30 min initial flag just failed to retest lows. And looking at the 5 min of the eminis I can see how longs felt comfortable coming into 3pm. It looked like the highs was just where we were heading. And then there was a change of character. And boy was I ready to pound into the shorts….

But as it turns out just when the longs looked awful and the shorts got their best risk reward for the play for the close the magic news came out about GS, BP and AAPL all within seconds of each other. I hate conspiracy theories but man that one is up there. Way to screw all the longs and the shorts.

The one thing I will point out though is that the IWM didn’t participate in that rally and that is sketchy. Seemed that rally was just short covering/screw job action and over reaction to GS news. The beef is in the price action overnight. If we somehow open below 1084 look out below. Currently (11pmish) the price action is not strong for futures but it is too early to tell. Weekly and daily charts point for retest of year lows. A gap above 1100 would certainly not be bueno for the shorts. But there is the possibility for an ultimate screw job doing the gap and crush just to really get the shorts out. Tomorrow should be interesting for sure. Not giving up on the shorts just yet but I am close to waving the white flag.

Happy trading

Days like today make me wonder why we often complain about HFTs so much. I mean think about it. All you had to do was do the following:

1. Buy SPYs at 103.02 on the open at risk below 99c. Ultimate piker play
2. Buy BIDU at 69.80 and risk below the magic 75c level
3. BUY AMZN at 111.05 and risk below the magic whole
4. BUY CLF after the whole lifts and play momentum and sell the close
5. this one is a bit more advanced. Look out. But you buy 59.26 and risk below the magic quarter…to catch 3 points. what’s so hard about that?
6. Sell BP at 33.20 and never be out of the money. i mean talk about infinite risk:reward.
7. Wait for FDO to open at 37 let it bounce 30c and then give it a nickel. What a great short.

you see these are all standard plays in the piker playbook for scalpers. What’s so hard about that? why aren’t we all making millions??

I received great feedback about this idea. And since I am asking for feedback and help of all you readers I think a great place to start is defining the algos I see all the time. Please leave comments if you see any subsets or any other algos you see often (let’s leave the creative name ones out for a bit).

As far as recording software I would certainly leave it up to the user to figure out what screen capturing software works best for them. I do not want to be responsible for any system problems/troubleshooting. Google screen capturing software and find one that suits your system. Instead of having you email me a ridiculously long file and have issues with that, we set up some space on our server for you to upload the files. To upload your videos onto our server please log onto our ftp server at: ftp://72.167.34.231 username: algos101 password: algomagic. When done uploading your video please send me an email at gman@smbcap.com with your comments and name of the video so I can use for the following post.

With that said, let’s get this party started. For today I wanted to start by just defining the algos. Will post the first video in the next entry.

1. Accumulation algo: Usually looks like an algo that buys/sells showing you holds on the bid/offer, accumulates, drops, gets people short on the tape, rebids, etc. Usually identified in ranges/consolidation portions of a chart.
2. Distribution algo: Very similar to the one above. The one major difference is that there doesn’t appear to be follow through on the moves. This tends to occur towards the end of extended moves. Often we get caught up trying to position for another leg that never comes. The smart buying/selling has taken place two legs ago and this one is just showing you buying and selling. Again looks similar to a range/consolidation in charts after extended moves.
3. Driving algo: The one that just blasts the bids/offers. Just needs to get the order in regardless of price seems like.
4. Market making (passive): aka. the GS algo. This one is very ridiculous. Probably the hardest one to identify. Hard to describe but you know it when you see it. Let me compile a few of these to see if i can get my point across. For the most part you can see equal number of prints in size seconds and pennies apart from each transaction.
5. The big order stepping: self explanatory. Takes place in the form of a large order stepping up or holds on the bid/offer stepping getting hit for size.
6. Big order broken down into little pieces: This is the one where you can tell there is buying in the market place hidden in all the 1-200 prints within a small range in price. Time and overall volume are the biggest factors in this one. Figured this one could be a subset of the accumulation algo.
7. Buy to sell: The magic buyer on the bid to sell a more ridiculous amount on the offer. Seen often down trending stocks, stocks that run up very quickly where you can tell it has to be a sell…
8. Sell to buy: the opposite of the one above
9. Buy the new low: the most annoying of all. I hope many of these got destroyed in the mini crash of may 6.
10. Sell the new high: well again, what do you expect other than massive selling into the new high to punish the day traders who like to blast the new highs. Looks like massive held offers at the new highs intraday on a stock followed by a severe/out of nowhere exaggerated downtick by all of those who just got caught.
11. The re-bidder: a subset of the accumulation program. The program buys on the bid, gets hit, drops a bit, and rebids for similar quantities.
12. The re-offerer: Similar to the one above.
13. The ultimate screw job: The headaches for most scalpers for size on the street. The big bid/offer where you lose buying/shorting in front and then when you flip.

Question from a reader sent on June 4th, 2010:
hi, guys! i want to ask u a specific thing about trading crm on the open today. crm was very strong yesterday, 93 – huge support. Due to weak market the stock opened below 93 and started to bounce on strong tape. i bought some at 93, sold 94. i made a point, that’s nice. i missed another two points – that is not so nice. so my question is: where should be my upside target for this type of morning trades based on yesterday’s chart?

Answer from Gman:

Thanks for asking a great question. We all have very different appetites for risk, trade off different time frames, have different holding times, etc so there is no right/wrong answer here. I think the most important thing to consider is that you have to be consistent with your time frames. If you made the trade looking at the daily chart because the stock broke out on heavy volume the previous day and you are interested in buying the pullback then there are two possible targets: 1. the previous day high, 2. the next level of resistance above yesterdays high as seen on the daily chart – if none available (all time highs) then you are holding until a new level is established.

However if you are using the previous day setup (trade strongly through new all time highs) as a way to have a bias and want to make trades on the long side for the next coming days then you have to stay consistent with the time frame you are using for your trading decision to pick your targets. For example, if you are trading off the 15 min chart then I see support at 92.90-93 with resistance around 94.25-94.50 and 95.7 – all possible targets. if you are working with a 30 min chart you can tell that 93 was a bit of a flag the previous day so buying the pullback there the next day gives you the previous day high as a target. If you are trading off a 5 min chart then obviously there will be many other levels that will make you sell “too early” when you look at the price action at the end of the day.

The reality is that you made a great trade. Great job identifying a great stock showing relative strength and buying the pullback/gap the following day where the market could drive right on the open. We all wish to capture the whole move of a trade, but in the end just remember that a sale, is a sale and is sale if it reaches your target. You can’t be mad if the stock went further if you were trading in a smaller time frame that does not account for such a large/extended move. Hope that helps.

Thanks to all for the comments on my last blog regarding algos. I thought over the weekend about the best possible way for all of us to learn about these pesty computer programs and here is my suggestion.

I always believed the best way to learn something complex is by using a dynamic and interactive technique. I thought it would make sense if everyone contributed a 3-5mins piece of tape on an algo they see and let everyone comment on it and we can all dissect the good, the bad and the noise.

I will start with a piece of tape on my next entry where I’ll offer my comments and let you guys offer your questions and comments. Feel free to send your tapes in .wmv or .flv format to gman@smbcap.com

Here are some suggestions on tapes:

1. Accumulation algo
2. Distribution algo
3. Driving algo
4. Market making (passive)
5. The big order stepping
6. Big order broken down into little pieces
7. Buy to sell
8. Sell to buy
9. Buy the new low
10. Sell the new high
11. The re-bidder
12. The re-offerer
13. Crush it like grape
14. The black swan
15. The terminator

That’s a pretty good start for now. If you guys have a better suggestion/approach I am all ears. Happy trading.

Oh yes I made up the last three but if you find a new algo we can totally brand that sucker.

Yesterday we received an inquiry from a reader regarding algos. Read the inquiry below:

Hi. I have been trading for 9years now and one of my biggest
strengths is tape reading. However, the algo programs are absurd these
days. How does the Gman distinguish real buying from some program
just market making a stock? Also, it seems like the programs are more
in NYSE stocks, then NSDQ stocks. Any thoughts?

Dan. J.

Gman here:

Dan first off glad to hear you have developed such great skill. I agree with you in that there are way too many algos littering stocks all day long. Algos with real orders can’t ultimately hide their size. For real order programs I look for repeating patterns of aggressiveness (offers for size getting scooped for example). But ultimately here are the factors that matter most:

1. Time of the day. On the open and close I expect to see most of the aggressive algos. In the middle of the day we expect to see the market making ones. Every now and then, specially with stocks with fresh news, you can see these real order algos in the middle of the day.

2. Volume: You ought to be able to see the volume come in through the box. If you can’t see it or if it is too sporadic then most likely the order is not big enough or the algo is not set in aggressive mode.

3. Where in the move you are. If you are trading the stock while the play is developing then you can expect an accumulation algo to be put in place; very easy for them to hide their size trading 2-300 shares a clip. If the stock is in drive mode then it should be easier to see its pattern.

Ultimately, the algos that make us the most and quickest money are the aggressive kind. The passive ones we experience in the middle of the day are way harder to read. But in the end, it does get easier with time to recognize these suckers. Hope that helps.

Yesterday I went home mad about my trading. Couldn’t believe the market cracked so hard and the shorts were so difficult in the stocks I was in. I came home and ITMN opened after being halted. I opened my platform, didn’t even bother to open charts and just got cracking. 20 Minutes later I was net positive. Like Bella says the day is not over until 4:00pm…well apparently it is not until 7:30pm these days.

On a separate note, my dog got sick last night after she ate the TVs remote control so I spent some time at the emergency room last night. Talk about a rip! Today I stuck around to keep an eye on her and traded ITMN on the open from home off the levels gathered from yesterday afterhours and no charts. You really can make money off the tape and those levels if you stick to that game plan only! Trying to understand the ticks in between those levels was nonsensical.

As I write this, the sucker is stuck between 10.50 and 10.80. If this holds above 11 I will be getting massively long for a move to 12-13. Currently long a small core out below 45c.

In light of Cinco de Mayo here is my fave margarita recipe. That will be my after hours trading gameplan. Chop!

Ingredients:
1 1/2 oz tequila
1/2 oz triple sec
1 oz lime or lemon juice

Directions:
Rub glass rim with citrus juice and then dip in fine granulated sugar. Place all ingredients in a cocktail shaker filled with ice. Shake 30 seconds and pour into glass. Repeat as appropriate without blacking out. If you start to slur your words that is a pretty good sign you have had enough. Do not pull the I am trader nonsense at a bar to hit on young ladies. Use the secondary game plan. But will talk about that one on another occasion. 60c

Over the last 6 months or so I have reflected back on my trading and have changed my style a good chunk. I have realized that as part of my development to become a bigger trader I have to focus a lot of my energy on trades that are scalable when the market permits it.

I can’t tell you how many times I have said or heard from other traders “I had the right idea but I got wicked out”. Or how is it that the stock went up 4 points, I bought the entire time and I am still negative?

I have been there many times. But looking back at my work I have realized that this often happens when I am either chasing a stock or I am unable to give the stock the proper risk it requires. Or most likely I was just thinking about that short term trade and have passed on the bigger picture idea.

Don’t get me wrong. There are days like two Fridays ago when the news on GS hit the wires when trading by the ticks made perfect sense. Momo trading rules in those situations. And thus having the skills to trade in that volatility is priceless. But what about the other 80-90% of the time when the market is relatively tamed and you have to trade ideas?

If you are new trader you have to develop the execution skills. You have to be able to read the ticks. You have to learn how to trade into a position. You have to learn the algos and how they move/manipulate the stocks. This obviously helps on days of extreme volatility, but also helps you minimize your risk when you are ready to make the transition into the big picture plays.

This is my focus these days. As part of that development before putting on a trade I always ask myself these things:

1. Is the structure of the day such that I can comfortably sit on positions all day?
2. If I make a short term trade am I looking to generate cash flow with little risk or by doing this am I passing on a bigger picture trade?
3. Is this a scalable trade? Meaning, if I ran a 50Mln book could I make this trade in the future?

Just wanted to throw that out there. Just some food for thought for those of you traders who have the skills and are looking to take things to the next level. Welcome any comments.

One of the best things of trading in a group environment is that you can get help from those who sit around you. Yes, trading is a competitive arena but that doesn’t mean you can’t look for help within your group. We love working with Dr. Brett but unfortunately for us he cannot sit next to us every day to make sure we get slapped in the face when we go on tilt – I don’t think he does that for traders per se, but you get my point.

That’s why you have those around you. They actually would slap you. I know Rosie is dying to get that slap party in place . But why bother helping that person next to you? its simple, that person next to you can provide a lot of value, a lot of trading ideas and can help you monitor your state of mind. It definitely is a win-win situation.

We have a couple of traders on the floor that need some help. And we have spent countless hours discussing what makes us go on tilt. We know exactly how we rip up money when we loose our cool. So in an effort to enforce those rules we are launching the “Shark Tank Reckless Fund For those Who Like to Drink on Fridays”.

Those participating must make a dollar contribution to the reckless fund if:

1. Violate one of his/her personal trading rules
2. Make a reckless trade and/or chase a move without a proper plan
3. Fail to make a trade that was on the morning gameplan
4. Violate your money management rules
5. You miss a trade on a stock/level you have followed for a few days
6. Make a time machine call outs (a trading idea called out that would be appropriate if you actually had a time machine)

Further, if you contribute $20 to the fund in one day you are done for the day. Proceeds of the funds will be used for our Friday’s shenanigans after the close. If it actually ends up being a substantial amount of money we may figure out a more constructive way to use that. Will follow up in a month to see if we need to either enroll on AA and/or our trading just improves dramatically.

The last couple of days I have been baffled by the market being defined by a handful of stocks. If you are not in them you have no shot in heck of making any money. Honestly, these days I tend to have about 20-30 positions both on the short and long, market stocks, little stocks, and just about a piece on every sector. What I find very funny…not, is to see the market pop on relatively heavy volume and see my weak market stocks get squeezed, my dopey little caps not go up a penny, and my market longs grind higher if that. Similarly on the downticks you see the market shorts grind down at best, the market longs get killed and the little ones doing their thing. Its just a nonsensical bbox festival out there.

Looking at the top volume stocks the last couple of days it cracks me up that 80%+ of the volume in the ENTIRE market place was done in a handful of names. And these are names that as active traders we just don’t trade. Most of the action/money/volume the last couple of days has been in ABK, FNM, FRE, C, BAC, GE, BPOP. And while we are in the subject how is it possible for a stock like ABK to trade 600Mln+ shares intraday? And the most nonsensical part to me is to see ABK trade over a billion shares in two days while going up over 300% and still be low on inventory for shorts on the street. I checked with some guys in the industry that have access to the major brokers and none of them had them available for shorts. Our clearing agent had a disgraceful/laughable amount for shorts. So I wonder, who was long the stock? was it just a handful of boxes trying to make a half penny? ummm…just some food for thought.

I definitely think the way to go these days is to stick to the most stocks in play and whatever happens to be doing the most ridiculous unusual amount of volume. Trying to time this market is just plain silly. The boxes will not give you a shot at making any descent money without feeling some serious serious pain. This is a market that rewards those who put in the work to find trading ideas and those able to hold onto that stock while the idea is developing. While I am on the subject of stocks in play we will be launching our SMB Radar product soon. It is our proprietary filter softwarethat finds the most in play stocks seconds off the opening bell. I hope many other active day traders will benefit from this awesome product. Stay tuned for details. Gman out!