Why Am I Getting Stopped Out More? (Part IV)

BellaMike Bellafiore's (Bella's) Blogs4 Comments

During Part I, Part II, and Part III of this series we identified a new algo on the desks of more traders that may be causing us to get stopped out more. For Part IV let’s offer some solutions.

Some ideas from SMB Readers:

Trade instruments wich are more liquid or trade on a higher timeframe.

Cheers,
Markus

This is an excellent adjustment to consider especially for those who wish to trade with big size.  However, I’ve noticed that stocks with tight spreads are trading with spreads that in practice are wider.

Idea is to trade with smaller position and than add to them as you get confirmation of breaking new levels and moving stops toward.

I like this adjustment. Trade smaller until you really are confident and then press. Do not take small losses here and there because you are getting wicked out of positions you cannot hold against you.

What about leaving a bid out there not for the purpose of getting hit, but to control how far down the algo wants to take the stock? For example, if you go long ABC at 30, have a bid at .85 or .90. If the algo is going to cut in front of you, then in theory it shouldn’t touch your bid at .90, thus giving you conviction to stay in the play. If for some reason you do get it, then that’s even better. Then you would just manage your risk accordingly…

Extremely creative here.  This is something I would expect from our friends at Kershner Trading.

Maybe its time to revert to the low liquidity strategy of fading highs and lows.

There are firms that specialize in this. I would suggest that they’re gonna have trouble controlling their risk at the tops and bottoms because of the new algo. And that will infect their results.  They may want to start smaller and wait to build a position so they are not wicked out. But this can really work if traders execute well. Excellent idea.

“Hide your orders.” From @biggercapital

Great suggestion and an old school back-in-the-day solution.  Hard to do these days, as the algo prints a hundred shares of your hidden order and then will start cutting you. But you may have a way to do this that we cannot. Knowing Michael this is probably the case so maybe an idea worth exploration at your firm.

It’s a dilemma… the only solution would be setting the stops lower, but then if it’s a real reversal you will close at a much worse price.

I agree that for most positions larger stops are necessary. I very much like where you heading here. Of course to do this means you must trade on a longer time frame so that your gains will be larger to account for the bigger losses when you are wrong.

Tomorrow we will wrap up this series with a complete list of adjustments. Thxs for reading.

Mike Bellafiore

Author, One Good Trade

4 Comments on “Why Am I Getting Stopped Out More? (Part IV)”

  1. Hi again. I guess I’m becoming a regular poster here, but something a few of us like to do here is find those algos and bid out a nickel or dime underneathe the buyer or buying the stock back right away.

    My rules on the play would be to stay long in front the buyer and smack out if it drops. However, if you notice only minimal volume go off and the bid drops only 2-3 cents enough to take you out, buy it back. The next confirmation I would need is the bid to come back on the tape. If he does not, I consider my reasoning for being in the trade invalid and I get out as safely as possible. At the very worse, I’ll place my stop below that wick or if I just absolutely believe the bid is messing around with me, I’ll wait until an offer holds below that previous level.

    How would you trade the situation, Bella?

    Jaynu from KTG

  2. whats stopping a firm like yours from developing algos that your discretionary traders can use that cut other algos.

  3. Thanks, MIke. Now I know why I lost money early on. I invested more than I could handle.

  4. Discretionary traders are not algorithmic traders by definition. It takes considerable skill and money to develop and maintain those algorithms that are so pervasive in the market. Deceptively simple on the surface like directional trading itself but think teams of mathematics, physics, statistics, and computational Phds being involved in the process. It sounds ridiculous but it’s beyond simple human day trading. Those programs are developed to operate down in the microsecond time frame where thousands and thousands of non-linear orders are sent and canceled in response to ever changing market conditions in an attempt to constantly arbitrage away supply and demand and take advantage of any source of liquidity all in the time it takes for a person to even decide to make the trade. HFT, algos, etc are things you need to specialize in to utilize successfully and not just as some side benefit to simple directional discretionary traders. All solutions used by human traders to try and circumvent the risks of dealing with robots requires some form of seeing the forest through the trees so to speak. I have a technology background as a software developer and know many extremely talented people who worked on mission critical real time applications in the business world and trust me, they were not about to pursue careers in algorithmic trading.

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