One of our readers asked a great question recently in response to our blog posts. Our reader, Sandor, pointed out that we have the tendency to write about the computer programs that populate most active stocks in the market. But we haven’t really explained fully what they do or their impact on us short term traders. So I want to briefly talk about the different programs and what they try to do.
Let me make something clear. This is not a lecture on how we trade against them. We cover that in our training program and there is a lot to learn and even more tape watching involved. It is just not possible to explain in a few sentences all the minute details involved in learning how to trade with them or against them.
Now with that said, I think first you have to understand that we trade with a very short time horizon. We analyze tick by tick how strong or weak stocks are to help us determine the bigger picture. Because of this short term mentality we pay close attention to the volume being done at certain price levels. Often times the order behind the volume is being handled by a person. Most other times, the order is being handled by a computer algorithm.
For those of you chart traders and technical traders it may be hard to see the difference. After all the only thing you may care for is the closing price of the candles on the different time frames. But for our style of trading it is imperative to be able to distinguish the difference. A computer program is nothing but a set of rules pretending to be a trader. A human trader still has to deal with the psychology and is dependent on his/her skills to work an order. As short term traders we have to adjust our trading depending on which of these two handles the order flow. But like I said, I don’t want to get into the how’s and why’s of this. It is just too complex of an explanation.
In my opinion computer programs can be broken down into four categories based on their job:
1. Programs that work a big order: these are programs that can be very aggressive and are the most fun to trade with. Their job is fill an order within some range in the stock. The bigger the order is then the bigger the moves can be. Best example of these programs are the ones that hit the bids or pay the offer until they are done.
2. Programs that accumulate stock: these are not the most fun ones to trade with. These are programs that have been created to accumulate stock in a very silly way. One of the hardest programs establishes a tight range and makes the stock look the weakest at the bottom of the range and the strongest at the top of the range. Another not so fun program is the one that buys a ton of stock lets the stock drop a little bit, makes the stock look weak, shakes out the weak longs, gets people short and then just sprays the offer higher. All these programs have something in common, they don’t tend to move the stock that much and as a short term trader we get suckered into them because of the volume they are creating.
3. Programs that trade a position: these are programs that manage a position once the stock is really moving. They hold bids and hold higher. Sell at the top of a range and buy at the bottom. In general these are very fun programs to trade with. Once you learn their buying/selling patterns then you are just piggy backing for the ride.
4. Programs that speculate in the market: these are just the worst of all of them. These are the ones we often complain about in our blogs. The most common ones are the buy the new intraday low, short the new intraday high, buys on the bid to sell on the offer, etc. In my opinion most of these programs target the average day trader and are willing to risk 25 cents to make 3-4 cents off of us. With those types of risk parameters the market eventually will take them out of the game. In the mean time they are just a nuisance.
I hope this brief description of the programs gives you an idea of what goes on behind very short term trading. I hope it excites some of you chartists and TA traders and encourages you to expand your trading. There is a ton of easy money to be made with these silly programs. There are a lot of nickels and dimes you can make off these dopey programs all day long. Enjoy the long weekend.