Monday, November 5, 2012

High Frequency Trading

MetaStock SPRS Series - Week 93 - TechniTrader® Stock Discussion for MetaStock Users - High Frequency Trading - November 5, 2012
By: Martha Stokes C.M.T.

HFT or High Frequency Trading has become a hot topic of late in retail news. It is important that retail traders understand exactly what a HFT is and what it is not, as well as how the HFT trading affects price so that you can be ready for the impact the HFT trading has on stock prices.

HFTs are a computer program. This computer program is based upon a formula that is designed by a Quantitative Analyst who is not only a high level programmer but also understands the financial markets. The goal of these automated computer generated orders is to move price, so that the faster trading can take advantage of the speculative action that follows.

HFTs trade on the millisecond. However Retail Traders are only permitted by SEC rules and regulations to trade on the minute timeframe. Your order by law must be filled within 90 seconds of receipt by the exchange. Many times your orders will be filled by your broker out of their own inventory, which is legal but can lead to poor fills due to slippage.

The HFTs trade on the millisecond. What that means is they trade 1,000 times per second or 60,000 times a minute which is your timeframe. If your order is executed within 90 seconds, the HFTs could have traded 90,000 times in that timeframe.

HFTs therefore have a decided advantage in terms of you trading against them. What you need to learn is how to trade WITH HFTs, getting in just before they move up price suddenly with long high point gain candles and huge surges of volume.

Chart 1

The IBM chart above has had several HFT big gains, with high volume days in the past few months. This is a big name company and HFT Quantitative Analysts know that cluster orders can be found wherever large numbers of smaller lots are buying or selling. By instigating either buying or selling prior to market open HFTs gain control of price for that day.

Usually smaller funds, retail traders, and small lot investors chase the HFT action which is highly profitable for the HFTs but often a losing trade for retail traders.

Identifying HFT patterns on a chart is the first step to understanding how to exploit their activities. When you can learn to enter before a HFT trigger order run, then you will be able to ride that run up for the day and take good profits.

Since liquidity is very high on this huge volume days, exiting is simple.

What you do not want to do is chase the HFT run up, because you will encounter whipsaws and losses due to their lightening fast trades that you are unable to see even if you are using a retail day trading platform.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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