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High Frequency Trading

07 Aug
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Let’s face it. We little guys are at a significant disadvantage compared to those institutions that are paying millions of dollars to put powerful computers on the trading floor. Milliseconds of time saved translates into billions of dollars in profits for Goldman Sachs and other High Frequency Trading (HFT) companies.

Now what would Bruce Lee do? According to Bruce, relying on a weapon in combat, any weapon, is a limitation. It is a limitation because it prevents you from using other techniques that may be more effective in downing your opponent. Likewise, HFTs using computers are limited. They are limited to pre-programmed algorithms that are only as good as the programmer. These HFTs also deal with large amounts of capital, much more than us little guys are handling. The limitations of HFTs became readily apparent with the recent Flash Crash where some select stocks were going for pennies on the dollar.

So how can the little guy capitalize on HFTs? Well, I recently discovered one phenomenon that may help. Late in the day (after 3:15) is my favorite time of day – this is when major swings often occur. This is particularly the case during extermely volatile times (such as now). Often when there is a significant gap down at the opening bell it translates into a major sell-off late in the day. I suspect this is due to mutual fund redemptions. People panic and sell their mutual funds. The adjustments are made by the mutual fund company at the end of the day. They can’t avoid it.

By studying late-in-the-day trading I found a very simple market characteristic that I would like to share with my readers. It is quite simple and powerful – all you have to do is watch the last 15 minutes of trading prior to market close, from 3:15 to 3:30 PM.

Some simple rules that vastly improve the odds of success for day trading. Here are the rules:

First lets define the parameter %DeltaIndex which is the index percent change over the last 15 minutes of the day.

%DeltaIndex = 100 * (Index at 3:30 – Index at 3:15) / Index at 3:15

In English, the rules would be as follows:
(1) if %DeltaIndex is small (i.e. less than +/- 0.33%) then continue with the trend established in the last 15 minutes.
(2) if %DeltaIndex is large (i.e. greater than +/- 0.33%) then reverse the trend established in the last 15 minutes.

Mathematically the rules are written below:

(1) If %DeltaIndex > 0% AND %DeltaIndex < 0.33% Then Go Long
(2) If %DeltaIndex >= 0.33% Then Go Short
(3) If %DeltaIndex < 0% AND %DeltaIndex > -0.33% Then Go Short
(4) If %DeltaIndex <= -0.33% Then Go Long

Stay tuned and be happy. Don’t let the markets get you down.

ProfitGyan

 

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