The Difference Between Buying A Refrigerator And Buying A Stock

This week on my Monday morning hit for “Business for Breakfast” I explain the difference between buying a refrigerator and buying a stock, as well as much more wackiness related to trading and the markets.

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Why not subscribe to for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).  Check out “The Best Of bclund” to get started.

5 Reasons You Deserve To Lose Every Penny In The Market

The body of my best friend from childhood, Eric Philips, lay motionless on a gurney in the county hospital.  He had just died.  Twice.

Eric was at the nadir of what had been a two-year addiction to heroin that took him from class valedictorian to strung out junkie.  One who broke into people’s garages in order steal things that he could fence in order to support his habit.

The journey had now ended under the harsh lights of an emergency room ward, surrounded by nameless and faceless medical professionals who were trying to ensure that the children he had yet to have would some day exist.

At the time his situation had sparked a very intense discussion among those of us that knew and loved him; who should be held responsible, the pusher or the junkie? Put in financial terms, the mortgage broker or the borrower? The financial “professional” or his customer?

We know that the financial pusher is consciously selling something that will cause harm to his customer, all of which has been documented recently in one of the best books ever on the subject by Josh Brown.  But what about the customer?  Don’t they have any culpability in this devil’s dance?  Where does personal responsibility come into the picture?

I ask this question because I just spent the weekend attending the San Francisco Money Show where I had a chance to interact with hundreds of financial customers.  I spent hours basically doing the “in person” version of what I try to do on this blog, helping people to better understand the markets and trading by showing them a different perspective.

I had a number of great conversations with some intelligent and thoughtful investors and traders.  But unfortunately, the vast majority of the people I spoke with did not fall into that category.  Instead they chose to embrace “active ignorance” about the financial markets.

They roughly broke down into five different categories, and if you are one of these “types” you deserve to lose all your money as far as I am concerned.

The answer to everything is gold.

These people are what are known as “gold-bugs” but they should be known as “gold-idiots.” And although thanks to the “broken clock” phenomenon they may have seemed wise at times over the last few years, remember, most have been calling this same tune since 1980.

“I don’t trust the markets so I am buying gold.”

“I don’t trust the financial professionals so I am buying gold.”

“I don’t trust the government so I am buying gold.”

“I think my wife is cheating on me so I am buying gold.”

“I am having erectile dysfunction issues so I am buying gold.”

That is all they can answer to any question, “gold!”

What’s even more ridiculous is that their distrust of the markets makes their myopic view exponentially worse.  They pay  huge transaction fees, taxes, and risk thievery by hoarding physical gold instead of “owning” it in a more efficient way that would free up space for homemade preserves and elk jerky in their shelters.

Technical Analysis is voodoo.

Let’s have a $100,000 Pyramid moment shall we?

Clue : “You find this on pottery.  It is often on doughnuts.  You will see it in the eyes of most people when you mention technical analysis.”

Answer: “What is glaze?”

I saw that glaze come out when I mentioned such crazy and exotic TA concepts like the simple moving average or a support/resistance level.  I might as well have been saying that Martians landed on the Earth as far as most were concerned.

It still boggles my mind as to how many people who are active in the market have never looked at a chart of the instrument they are buying, let alone tried to use some basic TA concepts on it.

On a TA side note, as I was turning down the hall at the hotel to go to my room, I heard a very well-known market technician who peddles his eponymous indicator say to his wife….

“Obama is going to ruin this country.  They should kill him!”

Democrat or Republican I have to say that is one of the most ignorant things I have ever heard someone say in public, even if he thought he was alone.  I only regret that I wasn’t quick enough to add to his “kill” list by saying as I passed him…

…”and promoters of black box vanity indicators that haven’t worked in ten years.”

The whole system is manipulated.

Algorithmic bots control the markets.  High-frequency traders control the markets. The Fed controls the markets.  The illuminati control the markets.  Justin Beiber controls the markets, well…at least the Canadian markets.

These folks have bought into the conspiracy theory that the market is controlled, but what is even crazier in light of their beliefs is that they refuse to stay out of it.

They use their theories to excuse their lack of success in the markets instead of adapting to the machinations that they claim are so “obvious” and then using them to make money.

I know everything.

I admit it, the people who fall into this group I have the least amount of patience for. Not only do they not want to learn anything new about the markets, but they feel that they in fact know all there is to know about the markets.

One lady I met spent thirty minutes talking to me, no…more accurately, talking at me, about her trading.  She knew all there was to know.  She had obtained trading perfection and had come to the show just to let people know about it was what I could only surmise.

When I brought up ideas like “The Most Important Concept For Successful Trading,” she either knew about them and had dismissed them or didn’t know about them and dismissed them.

At one point “A-hole Brian” showed up and asked her what she had thought about Rolo Tomassi’s book on finding consistently profitable trading setups.  She answered “I don’t find that his stuff works very well.”  Check please…!!!

Afraid of Social Media.

I have pounded the pages of this blog on what a powerful tool social media is when it comes to trading.  It may not be for everybody, but if you don’t even make an effort to get familiar with it and what benefits it can bring you, then you are just ignorant in my opinion.

After suggesting to one man that he sign up for StockTwits, his first question was, “what do they charge?”  I explained that it was free, but he could sign up and then follow some really good traders and leverage their trading ideas.

“Oh, well what do they charge?”

Once again I explained that it was free, but I could see the skepticism in his face.  I finished up by suggesting that he read my blog where I talked about trading in a different way.

“Ahh, I get it.  What do YOU charge for your blog,” he snapped as if he had finally discovered my hidden agenda.

“Nothing,” I said.

“Well, then why do you do it?”

“I’m just stupid,” I replied (in my mind).

Spending as much time as I do on StockTwits, it is hard to remember that no matter how large and deep the community is, it still occupies rarefied air compared to the public at large.

So much of that public has either put their head’s in the sand or decided that financial education is finite, relieving them of the need to keep evolving their thinking.  No wonder they have been like lambs to the slaughter for the financial services industry.

It’s never too late to learn though.  Some of the best conversations I had were with folks old enough to be my parents and who were as current and educated about the markets as anyone I know.

And as for Eric, well, it wasn’t too late for him either.  Those medical professionals were successful in their efforts.  Eric was revived for a second time, eventually cleaned his life up, and moved to France where he has lived ever since, now complete with a lovely wife and two beautiful children.


Could You Handle This Type Of Real Trading?

As retail traders we share a bond and a camaraderie about the markets.  We are not trading together, but we are not trading against each other.  That is not the dynamic between the locals in the trading pit.  It is survival of the fittest, where the act of “trading” exists in its purest form.  If you don’t know how to navigate the waters, you will be blown out in short order, which is the subject of today’s guest post by Jeff Watson.

Jeff is a veteran of the pits and has forgotten more about trading that most of us retail guys have ever known.  His blog masteroftheuniverse goes into extended periods of hibernation (like now) because Jeff is an active trader and that is his priority. However you can probe the archives of his blog to find trading wisdom that is as relevant today as it ever was.  This post originally appeared on his blog and he has been kind enough to let me re-post it here.

About 20 years ago, the wheat market was trading in a 3-5 cent range for the day. We were standing around in the pit picking off the orders, and when the orders were slow coming in, we would play around with the bids and offers, trying to pick each others pockets.

When the market was illiquid, locals would try to move the market by bidding it up or offering it down, and we could move it around a few cents pretty easily with little resistance. However most guys had a vested interest in not getting the reputation for “spearing,” which is the act of hitting the bid when someone is trying to bid the market up.

A person who practiced spearing was usually a newbie, who would try to make a quick 1/4 cent, or $12.50. This would sometimes piss us off, as a bunch of spearing could hold a market back for the short-term, believe it or not.

There was a new local who leased a seat and had never traded more than one or two contracts at a time, who would always spear you if he had a chance. By spearing, he was taking short-term gains, not looking at the big picture, and avoiding the big moves because nobody would give him more than one or two contracts. Since he never traded more than 10,000 bushels (or 2 contracts) at a whack, he wasn’t a presence, but a fringe player.

However, he had an overpowering ego, was loud and obnoxious, and thought he was a big shot because he had a badge….and was well capitalized.  The only time I saw him really trade was when I was offering March wheat at 6.80. I was a quarter cent above the market and was offering it to keep a spread in line. The other players knew that I had size, and didn’t want to go through me, and no one hit my offer.

We were all looking at the Chicago market, when it suddenly traded up a cent (a minute before, I had flashed my clerk and bought a large amount of WH [March Wheat] to cover a position there, and that uptick was my trade), and I offered more March wheat at 6.80. The kid hit my offer, saying “Take it.” I asked him how much he wanted, and he said, “All you got!” I said, “Sold 3,000,000 bushels (600 contracts).”

He sputtered, and said he couldn’t take that much, but I told him that he owned it already, and wrote the trade on my card. He started to protest, but the pit committee guy, and time and sales ruled that it was a good trade.

You never saw the color drain out of someone’s face as quickly as it did from his. The rest of the pit smelled blood and the other locals started offering the market down, then a couple of hedging companies started selling. The kid stood paralyzed, realizing that he had screwed up his short career in one stroke of ego.

He couldn’t get out of the market, didn’t have the talent to trade his way out of his predicament, and had no friends to help him out. Later, I found out that his clearing firm had to cover his trade and they ended up giving me the cold shoulder for a couple of days.

That day, at the close, I covered my whole 3,000,000 bushels about 2.4-4 cents lower, which was a great day for me. As for the kid, he never traded again in the pit. We used to see him sitting in the balcony for a few weeks, watching the action, haunting us for a while, then he disappeared completely. I wonder whatever happened to him.

One’s ego can cause ruination if left unchecked, like the kid in the above story. Ego and emotion can be the worst enemy of a trader. Trying to impress others by cavalierly putting on a size trade that’s 100 times bigger than you’ve ever done is a quick way to the poorhouse. Not thinking clearly 100% of the time while in the markets will cause you to bleed money to those who are thinking clearly 100% of the time.

Check out Jeff’s blog.

Read my interview with Jeff (and others) on trading the overnight session for Stock, Futures, and Options Magazine.

Why not subscribe to for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).  Check out “The Best Of bclund” to get started.

An Unusual Reason Why Your Trading May Be Suffering.

At a recent social event I ended up in a group of people who were talking about their jobs.  When the conversation came round to me I tried to use the standard line that I learned from my friend  Joe Fahmy.

“I work in an ice cream shop, ” I said with a straight face.  The conversation stopped momentarily as the group exchanged a few “what a loser” type glances, and I thought I was home free. Unfortunately, some dick who knew the truth spoke up…..

“No he doesn’t, he works in the stock market.  He even writes a blog about it!”

Cold busted!

So the conversation changed to the markets, trading, investing, and all the requisite things that go with those subjects.  Mind you I love talking about trading with anybody, especially novices, I mean that is what this blog is all about.

But the format at a cocktail party, where you have such a short a time to talk any one person, makes it tough to have a substantive discussion about trading with “civillians” since there are just so many basic fundamentals about the markets that they don’t relate to.

Anyway, the conversation wrapped up and as the group broke apart I told them if they wanted to know more about trading and how the financial industry really worked they should check out my blog and the book I ghost wrote, “Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments.”

Later that evening, one of the guys from that group approached me and began to ask questions about trading.  As the conversation went on he opened up and told me that he had been trading for almost two years now and that so far it was a losing battle.

He seemed like a nice guy and I was drunk by then so I thought I would try to help him out if I could.  After asking him a number of questions about his trading it was obvious what his problem was.  In fact it was the same problem most losing traders have; he held on to his losers too long.

Alert the press, right?  What new trader doesn’t experience that issue at some point? In fact even experienced traders still will make that same mistake.

But if there is one thing I have learned from all those years of watching Dr. Phil, it’s that you can’t just treat the symptom, you have to go to the root, and treat the disease.  It wasn’t good enough for me to say, “just sell quicker,” any more than it would be for me to tell an alcoholic “look, just stop drinking so much Grandma, you friggin’ lush!”

And I knew that if I wanted to “cure” him before the commercial break, I had to get moving.  I had to find out what the issue was.  Was he unwilling to book a loss?  Did he have an issue admitting he was wrong?  Was his computer monitor upside down?

So after doing my best amateur psychoanalysis routine for about five minutes I finally found out what his issue was.  He was afraid that he would not be able to find another good trade candidate.

Or put another way, he was not confident in his ability to analyze charts and determine what stocks were setting up for a trade, so he held onto the good setups he had found too long so as not to admit that they had failed, and face having to try to find new ones.

I have to say that I could relate to him on this issue, although in a different area.  If you ever have read my StockTwits bio, it goes something like this;

Great father. Good friend. Decent trader. Lacking husband. Solid drummer. Sometimes funny. Often A-hole. Shitty poker player. Too smart.

Each of these individual items is a blog post in themselves, but the one I am focusing on here is the “shitty poker player” part. It’s true, I have been playing poker for almost 30 years and I suck.

Poker to me is a social event.  I like to talk to the players, chat with the dealer, flirt with the cocktail waitress, listen to my iPod, and basically do everything that distracts me from paying attention to the game.  Because of this, about an hour after I sit down my focus starts to wane and I sense myself going into that zone where I know I am at risk of making one bad move that will undo all my profits to that point.

I then tend to latch on to good hands and overplay them, worrying that I have to make them pay off because I may not get another one.  It is surprising how often I take a big loss in poker on a great starting hand.

I have however adapted to this weakness of mine and formulated a strategy to negate its ill effects.  I first reach into my left pocket and pull out my wallet.  I take only the amount I am willing to lose at the table out and place it into my right hand.  Then I take my right hand and put it into my right pocket and deposit the funds there.  It’s fool-proof.  I never lose with this technique.

For my trading friend the solution was easy; I suggested that he subscribe to a trading service.  This way he knew he would always have a few potential trade candidates to choose from, which should let him feel free to drop losing positions quicker.

I also suggested that he try to “reverse engineer” how the picks in his service were arrived at.  With even a minimal amount of effort he should start to get a feel for certain setups on his own, which will only add to his confidence.

Why not subscribe to for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).  Check out “The Best Of bclund” to get started.

What The “Too Smart” In My StockTwits Bio Really Means

This week on my Monday morning hit for “Business for Breakfast” I talk about what the “too smart” in my StockTwits bio really means (jump to the 3:20 mark if you want to cheat), as well as stocks I think may be big winners.

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Why not subscribe to for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).  Check out “The Best Of bclund” to get started.

Should Trading Be Fun And What Is A “Skinny-Red”?

What a dull week it was in the market last week. Nothing was going on. Just lifeless, low volume mid-summer trading days. Zzzzzzzzzzz…………………!!!!!!!!!!!!!

By Thursday I was going out of my head with boredom so I decided to do something a bit different in my pre-market trading routine on Friday. First I switched my regular desk out for one of those semi-circle tables with the green felt, and then I invited some people to sit around it with me.

Howie and Loraine, a nice young newlywed couple from New Jersey. Phil, a nineteen year old kid with a fake ID. Estelle and Hazel, two sweet seniors citizen ladies from Florida. And lastly Hiromi, a guy from Japan who says he is in the Yakuza.

To top it off, I hired an ex-stripper named “Bambi” to come by and offer us all free drinks every 30 minutes while wearing a sexy Roman toga.

We all smoked and drank, and told each other interesting stories and anecdotes while I traded. When I made a profit on a trade, with my table’s encouragement, I “doubled down” on the next trade. When I was losing I just “let it ride.”

Unfortunately, by the time the market closed I had lost about 90% of my account value and will soon be applying for a job on the night shift at IKEA, but I did have a lot of FUN.

When you go to Vegas, the two best games to play in terms of odds are blackjack and craps. But here’s the problem, that is assuming you play perfect strategy on each hand or roll of the dice.

In blackjack it’s as easy as following along with the basic strategy cards that are sold in every gift shop down the strip. The dealers up card is a seven and you have twelve, just go down the columns and find your answer. Hit..!!! It’s as simple as that. Lather, rinse, fall asleep.

In craps it’s just as boring. You have to limit yourself to the Pass/Don’t Pass line and have to take the “Free Odds” allowed by the casino. If you find a table with 10x odds you can reduce the effective house advantage to .184%.

But who wants to do that? When I am playing blackjack, I want to have FUN. I want to be getting loaded, while smoking a cigar, and wrapping my arms around two ladies from Olympic Gardens (before I was married of course).

In craps I’m throwing out “yo’s,” “hard ways,” and “horn bets”. I want to be at the action table. The “live” game. The one everybody else in the casino is looking at saying “boy, I wish I was over there with that tall good-looking guy.”

That’s what Vegas is about; having fun, not winning. If you win money it’s a bonus. Consider yourself lucky, tip big, buy your friends a nice dinner, and bring something nice home for your wife, like a dice clock.

Chances are you won’t get “lucky” if you bring this home.

Making money in the markets is enjoyable, but the process of doing that is not necessarily “fun.” A lot of times it is boring. Often it is frustrating. And at other times it can be aggravating.

If you don’t know what you are doing, having “fun” in the markets can be very dangerous because it is almost impossible to have “fun” without emotion; and emotion in the market kills.

Some of the biggest losses I have ever had were when I was having the most fun in the markets. I remember traders going into 2008 that were having a blast. I would see them in the chat rooms every day throwing out big bets on this stock or that stock, and for a while they were “crushing it” and were the life of the party. But when that party ended they blew out. Fun is not a methodology.

And believe me, you don’t want to be that person who the fun ends for. Hell, you don’t even want to be around that person when the fun ends.

In my early twenties I went with a group of buddies to Vegas for what was maybe the second or third time in my life. I was barely adept at playing blackjack at that point and was totally intimidated by the non-stop action and colloquialisms of craps, but my more “seasoned” gambling pal convinced me that I should give it a shot.

Bolstered with barley-and-hop based courage I sidled up to the rail. I watch my friend play for a bit and started to get the rythmn of the game down. Before too long all my other friends and I were ringed around the table, drink and betting.

I would basically parrot what my friend was doing. He look so experienced, so worldly, and man was he having fun.

“Give me the yo-eleven,” he would shout while simultaneously tossing a $5 chip towards the stickman. “Yeah, I’ll take the ‘yalenven’ too,” I would say.

“…and give me the ‘hard four and eight’ and ‘four on the field’ boxman,” he continued. “Yeah, ‘the field’,” I echoed.

This was great. Chips were flying, the booze was flowing, and we were making money. The table had a vibe to it, a palpable energy that seemed to lift it and its players off the ground, levitating us just above the cigarette stained carpet.

We were the table everybody else wanted to be at, were having a great time, and my buddy was having the most fun of all.

Then it all went bad. Real bad.

As I went to take a swig of my beer, my friend grabbed two $10 chips and gave them a sideways toss towards the felt as if throwing the keys of a Maybach to a valet. He then uttered the fatal words….

“Twenty dollars on ‘skinny-red’.”

The boxman looked puzzled for a moment and said “what do you want this on?” My friend, looking nonplussed, repeated “skinny-red.”

“I’ve never heard of skinny-red,” the boxman replied.

“What, you’ve never heard of skinny-red,” my friend asked with a smarmy air.

At this point the boxman looked at the stickman and asked incredulously, “Dave, have you ever heard the term ‘skinny-red’ before”, knowing the answer before he asked it.

“No John, can’t say that I have,” came the reply.

Most of the other players had laid down their bets by now and were ready to get on with the next roll to keep the table’s mojo going. Even as a newbie to the game I knew my friend was treading on thin ice here. I gave him the “why don’t you just tell them the goddamn number you want” glance, but he looked right through me.

“I can’t believe you have never heard of ‘skinny-red’ before,” he said while taking a sip from his drink and pretending he still looked cool.

The stickman now motioned to the pit boss. “Hey Max, have you ever heard the term ‘skinny-red’ before?”

“You know, I have been in the business for twenty-five years, and I have NEVER heard that term before,” the pit boss replied.

I’ve written before about the “second mistake theory.” My friend had already made a mistake by pushing this issue instead of just saying the fucking number he wanted, and I was now praying that he wasn’t going to make the second mistake. My prayers were not answered.

“What….that’s what they call ‘twelve’ in Hawaii,” he blustered.


You ever hear that screeching sound a car makes when it hits the brakes suddenly, bringing itself to a dead stop? I swear I heard that sound right at that moment.

What had just moments before been a lively, energetic, fun table was now a morgue, complete with a dozen sets of angry zombie eyes staring right at my buddy, as well as the rest of us.

“Really….I didn’t know they had gambling in Hawaii,” the pit boss said looking straight at us with not a trace of humor.

My friends and I, in order not to lose face, stayed at the table, pushed our luck, and eventually “sevened out,” losing all the money we had made. We did have “fun” though… least for a while.

As a trader your goal should not be to have “fun” but to trade as stress free as possible, using a methodology that removes emotion, and keeps you leveled.

Save the fun for spending the money that you make from consistently dull and boring trading.

Why not subscribe to for free Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

The Top Ten Trading Movies……Yeah, Don’t Think So!

Recently Futures Magazine put out a piece entitled “Top 10 Trading Movies.”  Take a look at their list.

  1. Trading Places (1983)
  2. Too Big To Fail (2011)
  3. Rogue Trader (1999)
  4. Margin Call  (2011)
  5. Boiler Room (2000)
  6. Working Girl (1986)
  7. Barbarians at the Gate (1993)
  8. Pi (1998)
  9. Enron: The Smartest Guys in the Room (2005)
  10. Inside Job (2010)

Personally I think the list is weak in both content and order, I mean what the hell is “Pi?”  (I’ll tell you what it is, it’s some editor’s attempt to be hip; like those people who tell you about some great movie you “just have to see,” because it won Best Screenplay the Independent Spirit Awards).

You can take “Rouge Trader,” “Margin Call,” and “Too Big To Fail” off the list because they are heavy-handed docudramas.  Throw out “Enron: The Smartest Guys in the Room” and “Inside Job” because even though the events these documentaries cover are factual, the smarmy and one-sided way they are presented is a turn off.

“Working Girl?”  Do I even need to say it?

Despite the fact that “Barbarians at the Gates” is a docudrama, it is done with a light, and at times comedic touch.  It chronicles the excesses of the 80’s (in the context of the RJR Nabisco LBO) without sounding like a lecture from Barney Frank, so it stays on the list.

“Trading Places” and “Boiler Room” are no brainers.

Where the list really falls down though in my opinion is by not including “Wall Street.”  I don’t care how cliché’ it is, that movie is probably responsible for at least half the people who are reading this right now to have tried trading at some point.  (The exclusion however of awful “Wall Street: Money Never Sleeps” was a wise and admirable choice).

I would round the list out with “TRADER” the fascinating 1987 PBS profile piece on Paul Tudor Jones (watch it below before YouTube takes it down again).

In my book there just aren’t ten good trading related movies out there, so this is my “Top 5 Trading Movies” list.  What do you think of it and what are your suggestions?

  1. Wall Street (1987)
  2. Boiler Room (2000)
  3. TRADER (1987)
  4. Trading Places (1983)
  5. Barbarians at the Gate (1993)

* Kid Dynamite, who I have mad respect for tells me that “Pi” is in fact one of the “most underrated movies of all-time.”  Being that it is the only movie on the list I haven’t seen, I will defer to him.  Here is the trailer for it if you want to check it out.  Pi (the movie).

**Tom Morton of The Equities Room notes that “Quicksilver” is the best bike messenger/trading move of all-time.  The trailer for that is here.

Top 10 Trading Movies  (via Futures Magazine)

Why not subscribe to for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).  Check out “The Best Of bclund” to get started.


5 Ways You Can Combat High Frequency And Algorithmic Trading

High Frequency Trading HFTNote: I get new stock ideas every day from the SPARK app. Download it free from iTunes.

Alright, I admit it.  For a long time, a number of traders who are much smarter than me told me tales of stops being run and seeing mysterious outlier volume prints during the trading day.  For the most part I dismissed these claims, likening them to being the stuff of conspiracy theories.  You know the type.

Man never landed on the moon.  Okay, sure buddy.

JFK was killed by the mob.  Uh huh…..right, right.

My 45-year-old cousin who has never been married and owns a vintage dress shop called “Out of the Closet” isn’t gay.  Yeah whatever….!

But about four or five years ago I slowly started to change my tune as I realized that manipulation by HFT’s and algorithmic trading was in fact true.

The seeds of this manipulation were sown when the exchanges switched to decimalization back in 2000.  This meant that instead of 1/16th of a point (6.25 cents) being the smallest price change that a stock could move, they could now move in pennies.

The change was supposed to benefit the retail trader, giving them tighter spreads and ideally more liquidity, but technology began to bastardized the concept, slowly turning it into a disadvantage for the average trader.

The problem was only exasperated when the exchanges were allowed to go public and the overriding idea was more profit which meant more transactions.  It has now gotten to the point where the computers for HFT firms sit next to the exchange’s servers and rivals compete to see who can have the shortest CAT 5 cable connecting them.

In addition to seeing this problem from the trading side, over the last few years as I ventured over to the brokerage side, I began to get an even clearer picture of the shenanigans that go on.  Now I regularly see fill reports from the exchanges that go six places to the right of the decimal (as seen in this example of a trade in $KBH from yesterday).

What can you do as a retail trader to combat the companies, traders, and bots that have almost unlimited funds and resources and perpetuate this problem?  You have to think “out of the box,” and here are five suggestions on how to do that.

Change the way you trade patterns –  It used to be that trading a breakout from a traditional chart pattern was the money.  But then everybody in town traded the breakout, and HFT’s took advantage of that and trading the false breakout became the money.  But now, trading the breakout in the original direction of the pattern after the false breakout is the money.

Point is, you have to give patterns more leeway, even to the point where traditionally they would be considered “distorted” or “broken.”  Ha, ha, ha, laugh all you want, but if you trade a pattern in the traditional way these days you might scare off a nice baby who’s ready to party.  Sorry, I watched “Swingers” last night.

Embrace the “tail” –  I spent twenty years trading in the opposite direction from tails; the long thin extremities most apparent on candlestick bar charts.  The idea being that price had penetrated those levels, was rejected, and then should reverse away from the tail.

Back in the good ole’ days, meaning 2007, I started to see Trader X talk about the ends of tails as triggers to get into a trade.  For example, using the low of a hanging man candle at support as a trigger to get short, illustrated in the chart below of $FB.

Because I used to be the “world’s smartest trader” and didn’t listen to anyone else, I brushed aside the idea.  But now due to the tendency of HFT’s to “probe” past support/resistance levels momentarily, tails are more prevalent and less significant than they used to be.  Try using levels created where multiple tails line up as the true support/resistance levels to trigger your entries instead of the more traditional levels.

Re-think your ideas on stops –  In the past I have written about three different techniques for placing stops that can help thwart having them run by HFT’s.  The concepts revolve around being more dynamic in the way you place them and using a chess like mentality to think a number of steps ahead.  You can read the specifics of these ideas in my post, “How To Place More Effective Stops.”

Stick to high volume stocks – As of this writing it is still pretty hard for HFT’s to manipulate the movements of highly liquid stocks like $AAPL or $MSFT as well as many widely followed ETF’s.  Keep in mind that the higher the volume and tighter the spread, the less susceptible a stock is to mechanical machinations.

Take a longer time frame – Once again, as of this writing HFT’s can only affect price in the short-term.  As you go towards longer time frames, like in swing trading, you can almost completely eliminate their influence.  The one codicil to that is that when you are tying to find an initial entry for that swing position you may have to scale in or give the position a little bit more room so as not to get stopped out.

BONUS TIP: (don’t say I’m not a giver)

Switch asset classes – HFT’s are most prevalent in equities and somewhat in futures. One area that they are not as involved in, or if they are don’t seem to make as much of an impact, is in options (especially weekly options) or forex.

Trading successfully always involves adaptation.  It’s the nature of the game and always will be.  The HFT’s and algorithmic bots that are currently running amok in the markets can cause difficulty, but with some creativity and strategy their effects can be muted to a great extent.


Don’t Be Afraid To Go With Your Strength

In 1973, Robert Plant of Led Zeppelin, at the height of his band’s success, jumped up in the middle of an interview at the Hollywood Hyatt, walked out onto the balcony, spread his arms wide as he surveyed the Sunset Strip, and said to nobody in particular, “I am a golden god.”

I was a golden god once.  Not the type that threw televisions out of hotel windows or had a gaggle of groupies fighting to get me into the sack, but the type that ruled that soccer pitch. With a flowing mane of auburn hair and a wicked left foot, I once scored a goal in under eight seconds from kick-off and put up thirty-two goals in a single season.

Robert Plant – If only he was good at soccer.

I loved the game.  I loved everything about it.  On Friday nights I would wear my uniform to bed in order to be ready first thing in the morning for my Saturday game. I couldn’t wait for Tuesday and Thursday nights when I would practice “give and go” drills for hours on end with my teammates as the tule fog rolled across the grass at our local community field.

It was one of the things that I was truly good at and even in an age before pro soccer became popular in the US (okay, let’s say more popular than badminton), I had dreams of grandeur.   I could see the Europeanized version of my name on the scoreboards of stadiums all across the Continent….

Brian Pele’ Beckenbauer Lund

Then came football.

I remember it like it was yesterday.  I was sitting at the beach with my friends just enjoying the summer sun when I remarked that “Chris Stevens was going to go out for football.”  I said it with a sarcastic disdain because what type of “rockhead” would go out for football?

Sure I liked to watch the NFL on Sundays, but I had never played a serious down in my life.

And weighing perhaps 125lbs soaking wet and holding a brick, the idea of putting on a helmet, pads, and then running full speed into some guy that had been playing Pop Warner since he could stand held little appeal to me.

I was sure my comment would be met with riotous laughter by my friends as none of them had ever played the game either.  Imagine my shock when my friend Brad said, “so am I.” Then my other friend Ty said, “me too.”

I looked over in stunned amazement at my final friend Eric Phillips.  Eric the punk rock rebel who did everything he could to go against the status quo.  Surely he would not be participating in this clichéd endeavor of adolescent machiso….right?

“I am going out for the team too,” he said.  At that moment, somewhere in a Northern English cemetery Sid Vicious rolled over in his grave, shot up, and then puked all over himself.

Sid Vicious – The Anti-Robert Plant.

I should have stopped at that moment and made up my mind that I was not going to do something that I not only didn’t like, but was not in my area of strength.  Unfortunately, at the high school I went to, there was football….and then there was everything else.

Our football program once held the record for most consecutive wins West of the Mississippi.  We played a championship final game in front of twenty thousand fans at Anaheim Stadium and beat the other team 55-0.  USA Today ranked us number six in the nation.  Football was in our school’s history, its blood, it’s DNA.  We were like a high school version of Penn State without the anal rape.

There was no way that the skinny insecure teenager that I was could have gone against the “crowd,” no matter how good I was at soccer.  I didn’t have the courage.  The self-confidence.  The will to go my own way, to stay with my strength no matter what the popular thing to do was.  And so began the four longest, and at times painful, years of my life.

What’s funny is that along the way certain people dropped off the team, including my friend Eric.  The party line was that they were “quitters” who weren’t “man enough” to handle playing football.  True, I am sure that was the case with some, but there were also a lot of guys who were pretty good and looked like they would have been starters that quit as well.

The reality is that I think most of then just realized that they didn’t like football and didn’t care what anybody else thought.  They weren’t going to waste their time being miserable when they could be doing something else they really had a passion for.  I envied those guys.  I thought those guys were the real deal.  I wished I were those guys.

In the markets there are a lot of people and forces that will tell you what you should and shouldn’t trade.  Talking heads on TV, anonymous traders on the streams, and even good-looking bloggers; everybody has advice.

“You have to trade $AAPL.  All real traders trade $AAPL”

“Forex is where it’s at.  Only losers trade equities anymore.”

“The liquidity is in futures, that’s where you want to be.”

….and so on.

If I suggest to you that you stay away from low-priced stocks, that is based on over two decades of trading and interacting with traders.  But it’s just a suggestion.  If you have an affinity for those types of stocks and they work for you, then stick with them.

Don’t like trading $AAPL?  Then don’t.  If forex doesn’t work for you, then pass on it.  If out of the money long dated options are where your strength lies, then trade the hell out of them.

Going against the crowd just for the sake of going against the crowd is a fool’s game. But having the guts to trade what the majority avoid or avoid what majority trade because it works for you is one of the signs of a great trader.