All around us technology and specifically computing power is expanding at a exponential rate. This has led to a explosion of high frequency trading firms, and demand for programmers, quants, physicists - you name it. Everyone wants to get an edge, and if they can get a billion data points into a computer to analyze the data, they should be able to define an edge and exploit it.
Further, if they can have a computer program execute the buys and sells, then they will eliminate the human mistake element in trading which would be identified as emotional weakness, as well as lack of speed. These days any time you look at your screens there is a good chance that you are up against algo robots.
Should this scare us out of the trading arena? - Absolutely not.
Firstly, there are human's who are programming these inputs into the programs, and therefore your job is still to figure out the human element and what they perceive to be important data points for program into their platform.
Secondly, this is a new wrinkle to the game, and like any other player in any other game, one must adjust to it.
What we now tend to see is extremely exaggerated price moves and volatility being generated by the speed of these machines -
Lets take a look at the recent US presidential election. The night of the election, there was a Machine war going on - back & forth the S&P whipped around, all depending on which way the vote tally was coming in for the state of Florida. Every time Trump edged in the lead, futures plunged - When Clinton gained momentum they rallied. In the wee hours of the morning when it was clear Clinton lost, the S+P was limit down around 110 points. A few hours later the S&P was flat and it continued to climb higher over the coming months.
If you were up watching, which we were, it was evident that the ferocity and speed of the whipping was chewing up both longs and shorts. However, for the speculator that deduced that Trump would win and that this would usher in a inflationary environment, they were able to buy and capitalize on a 10% gain within a month. Regardless of the madness that happened that night, one could have easily side stepped the carnage and continued to execute their playbook.
The main point here is that machines can't be "right" in the intermediate term - Because the intermediate term can't be predicted. What they can do is run your stops and trigger technical levels where they know leveraged traders' positions are, forcing them to close their position for a loss, only to reverse price once the fleecing is complete.
"We came. We saw. We Terminated the Levered Marks."
When battling a machine, you have to understand what you are up against and that night clearly defined this for us.
1) Speed and Exaggerated Moves - When "the news" comes out, whatever it is, it is simply too late to act. By the time you type in your order, a army of machines will have already executed all of their orders. So this means that you have to get busy placing your orders either when times are quiet and prices aren't moving wildly; Or you wait for the robots to overshoot, and then take advantage when the inevitable regression to the mean occurs.
2) The Machine's edge is really only in the very short term - They will beat you to the punch every time. They will front run your order and steal a tick from you. So we must parry this advantage by trading larger swing moves as opposed to being in and out for a few ticks. Here at 3ptCapital over favorite time frame to play is the 15-20 day period. When we enter a position we have a view of the expected 20day horizon for price movement. Further, you know we are hedged in case we are wrong. As this happens frequently, our insurance bet will save us from an unforeseen event or algo attack.
If you employ these 2 tactics: Intermediate Time Frame + Hedging your position, the machines wont be able to beat you. Let them pulverize their levered marks. You simply wait like a sniper at a safe distance, and pick them off at an opportune time.