As we have mentioned previously in my blog some have emailed me with concerns that program trading will rule trading soon. The market will never displace the disciplined independent trader. What is certain is that programs mandate that you adjust your trading and more selectively choose your entry points. Let’s take a look at ELN from yesterday to illustrate this point (chart below).
ELN had trouble trading below 10.90 and above 11.10 on the Open. The stock traded above 11 and below 11. We call this the Above Below Program. Our desk isolates the more prevalent trading programs and has a strategy to trade against them. When you see the Above Below Program you cannot tell whether your stock will trade higher or lower. Don’t try and guess which way the stock will move. And do not trade the stock until it moves away from 11.
Too often new traders take mini rips trying to get long at 11 when the bid holds and get short at 11 when the offer holds. And the bids drop and you hit the bids for a small loss. And the offers lift so you pay the offer for a small loss. It’s like death by a thousand cuts. These small losses can really add up. Pretty soon you look at your P&L and you have lost $800 and the stock has not moved. And maybe worse- the programs irritate you such that your mental state turns from calm to frustrated. This is example of trading poorly against the programs.
Since so much volume was done near 11 you watch closely to capture an explosive move in either direction. But since the move is going to be explosive you do not need to be in the first ten cents of the move. That first ten cents is the hardest part of the trade. As discussed in the last paragraph you may continually get shaken out for small losses. Let the stock move away from 11 and play the momentum. So for example let ELN trade above 11.10 and then play the upside momentum. And get short ELN when the offers holds below 10.90 and play the downside momentum.
This small adjustment combats the Above Below Program. Be in ELN when it’s moving.
Good luck with your trading. And enjoy your weekend.
SMB Capital, Partner