Beating the HFTs

Its been estimated that the algos are responsible for almost 70% of the trading volume on futures markets. So as the pit locals disappeared as the pits were made redundant, the algos came in to take their place.

I've been writing about this transition for years and I think we have now come to the new normal although there will probably be more evolution due to regulation and technology changes. Most traders are still trading as if the old normal was still in existence.

Seeing the writing on the wall I started using hybrid trading also some years ago as chronicled in this blog. I defined hybrid trading as using an algo and turning it off and on and choosing different logic for a specific context. This is, I believe, what is required to beat the algos. The speed and reactions of an algo are needed to match the speed and reactions of algos if I want to win trading short time frames. Also, my algo can read and react to the order flow much quicker than a human can.

I have hybrid algos in MultiCharts, Ninjatrader and MarketDelta. The Ninjatrader version makes more efficient use of the PC's resources and now, with Ninjatrader 8, there are microsecond time stamps on each tick so that the order flow can be correctly followed. Each platform is better at something than another platform so it is a matter of using the one that best meets your needs in both functionality and ease of programming.

My algos use a button system that allows me to combine a number of conditions and rules with specific orders that will only execute when everything is true. The pic shows the completed Ninjatrader 7 version which requires tick recording. The Ninjatrader 8 version, is still being developed but has better volume capabilities in addition to correctly tracking order flow.

The functionality needed is a series of buttons that allows me to create a triggerable set of rules that shoot an order immediately those rule conditions are true. I watch the context and when I see the right context I arm a number of the buttons so that the algo can trigger the order from my Virtual Private Server that is co located at the exchange so that I get a less than 2ms latency from the moment that the conditions ar met and the time that the order hits the exchange matching engine.

The series of buttons decribe some context as well as order flow conditions. There are also trade management buttons so that I can have the trade management orders shoot out immediately I have a fill.

 

This type of functionality is available in a number of platforms out there now.

Nothing Has Changed Except Everything

If you go back to the beginning posts of this blog you will see that I emphasize that the math of your trading plan has to work or you can't be CP.

That has not changed nor can it ever. The three legs of the stool ate win rate, average profit and average loss. Those three metrics have to work to enable CP. However, there are many permutations and computations of these three metrics. basically, a high win rate allows a lower average profit. That's how scalpers make a living, keeping losses small too.

Remember, you can still be marginally CP if your win rate is just 35% as long as the win to loss ratio is 2:1 or greater.

That being said, if one randomly puts on a trade either long or short there should be a 50% chance of profit. If that is the case then just putting on a trade and having your stop loss marginally smaller than your profit target should make you CP as long as commissions are covered too.

So why do most traders find it difficult to get to CP? The answer has to be that they don't follow the trading plan. As someone who is also guilty of that sin more often than I'd like to admit, I understand the problem. If this is the issue then putting the majority of your effort into becoming more disciplined must be at the top of every trader's To Do list.

My focus for the last year has been to use technology to help me better execute my trading plan. Its not the latest indicator. Its not the latest methodology. Its just following order flow and managing my trade so the math can work.


Happy Holidays to everyone and I wish you all a profitable 2016.

PS. The everything that has changed is the markets. No Locals except electronic locals and lots of algo action. But its still just order flow.