There was a platform computer game in the late 1980s to promote Domino’s Pizza called “Avoid the Noid”. The ad featured a “Noid” that destroyed pizzas and must be avoided. Active traders have our own version of the “noid” in the form of HFT (high frequency trading) robots. Except this noid doesn’t destroy pizzas, it destroys traders.
By creating what I like to refer to as “noise”, these bots wreak havoc on intraday charts, setups, and technical indicators. They prey on conventional wisdom ignoring moving averages, support / resistance, and breakouts. With Jack Bauer like precision, they seem to know the exact level of pain to inflict to get traders to cough up their shares. And if greed is your demon, get ready for the mother of all vicious snap backs.
For a trader to be successful in today’s financial marketplace I believe it is crucial to “avoid the noise”. Three adjustments that have helped me avoid the noise and profit in this low-volume, HFT manipulated market are:
1. Smaller size and scaling in
At TodayTrader we often quote “The only two things you can control are your share size and your attitude”. Entering a trade in small lots (one third to one fifth at a time) will help you stay in a position as it takes the scenic route from point A to point B.
2. Longer time-frame charts
Bots feast at the micro level. They have the advantage, and the 1 minute and 5 minute chart is their playground. I have been focusing and trading more off the 10 minute and even the daily charts. I still use the 5 minute chart but will marry it up with longer time frames to keep me in a good trade.
3. Go with your gut
Bots are designed to take your money and will break down the technicals to do so. I know this is the nature of today’s market so when I feel that I am right in a position I will sit thru more pain than I would in the past. Don’t get me wrong. It is important to have a defined stop; I am just a little more liberal when it comes to setting them.
Example of successful trade
Let me give you a good example where all three of these helpful trading tips allowed me to stay in a trade and ring up a nice profit. Look at the chart above. On 10/8/2010 I noticed the casinos got out of the blocks early and were showing some bullish price action (MGM LVS etc). About 25 minutes after the open WYNN had a pullback and I entered a one third position (scaling in with small size) at 90.10. It pulled back further and I entered another third at 89.56 on the 10 moving average. I really liked the daily chart and that combined with the strength in the sector gave me conviction (going with my gut).
After checking out the 10 minute chart, I told our clients I would like to see it hold 89.50 but I was willing to give it to 89.40 because I liked the risk reward potential in this one. The stock wicked below 89.50 quickly to a low of 89.46 and then bounced, eventually going to highs and exploding. Unfortunately, I was working other trades and was unable to buy another third. I sold my last shares 92.97.
At TodayTrader we believe it is crucial for a trader to adapt to the ever-changing market. If you are having a hard time adapting to HFT try playing smaller size and scaling in, stretching out the time frame removing yourself from their playground, and going with your gut more often. It will help you “AVOID THE NOISE”.