On my way back to the US from a diving trip in the Philippines with my husband, I passed a few book stores that were selling a book regarding aware high frequency trading. I did not purchase the book as it was not something that interested me.
However when I arrived home the author of the book was being interviewed on TV and as it would happen I had brought home a section of the Strait Times from Singapore and lo and behold there was an article on the subject there too.
So while I was still not interested in the book I became interested in the subject.
The reason is that the interview on TV raised some disconcerting questions regarding whether the stock market is rigged against the retail investor or not.
To determine whether this is the case let’s first define what is meant by high frequency trading (“HFT”).
There are individuals who possess computers that are programmed to “see” stocks trades as they are getting ready to be processed. For example a person wants to purchase 100 shares of IBM and the computer quickly purchases those shares and then instantly (in milliseconds) makes them available for that order.
“A controversial computerized trading practice offered by some stock exchanges. Flash trading uses highly sophisticated high-speed computer technology to allow traders to view orders from other market participants fractions of a second before others in the marketplace. This gives flash traders the advantage of being able to gauge supply and demand and recognize movements in market sentiment before other traders.” – Investopedia
The owners of these HFT computers pay an average of US$30,000+ per month for the ability to participate in this type of trading. You can see how they need to extract thousands of dollars just to get to the point of paying for that seat on the exchange. The key is to get in ahead of the investors.
This is called “front running” a trade.
While this is illegal if done by an individual (I want to know how that would even be possible) it is not illegal if it is done by a computer.
Why is this not good for the investor? Because the investor is paying slightly more for the stock than they would normally be paying.
Because of this environment the news in the US has jumped all over the stock market indicating that it was known all along that the markets are stacked against investor.
How can this be? The computer is not concerned with whether the investor is buying or selling a stock.
They are not causing the stock market to either go up or down! They are simply front running the trades which is far different from the rigging of the stock market. I do not believe, therefore, that the stock market as a whole is rigged.
However can some stocks be rigged?
I believe that stocks that are lower priced, small volume stocks can be rigged.
The SEC has in the past and currently continues to crack down on this type of activity.
If anyone is interested there was a really good movie with the actor Ben Affleck called “Boiler Room” that clearly drives the point home regarding the dangers of investing in these types of stocks.
As Smart Traders how do we make sure that we are protected?
We would want to avoid participating in stocks that have 500,000 shares or less traded per day.
In addition how can I make sure to always get the best possible price when we get ready to purchase a stock?
The key is to always use a Limit order.
The limit order does just that – limit how much I am going to pay so that when my trade goes to the floor I can’t pay more than it was being offered at my time of entry.
How cool is that!
The SPY had made a high price of 188.96 on 7 March 2014 which created close to a 10% separation from the 200dma. What follows was a market pullback to close a portion of that space. Remember that we are towards the end of the market’s 5 year up cycle and could begin to see a significant pullback any time.
For those of us that own stocks be mindful that we cannot purchase stocks unless we are properly hedged with a Put option. I have shared this technique in our trainings.
Remember however that we have been enjoying these share price movements to the upside because the overall market’s direction is to the upside. As long as the SPY is trading above the 200dma (daily moving average) we know we can purchase stocks (and still be hedged).
However once the market closes below the 200dma I myself will not be looking for purchase stocks since I don’t want to buck the direction of the overall market.
However realize that when this next market consolidation takes place we will have so many new potential buy candidates and we can see some unprecedented returns owning the stock.
This is an article I wrote to my members back in Nov 2013.
Well it has happened again. A lot of hype, excitement and energy by the brokerage houses over the Twitter IPO (ticker symbol TWTR) much like we had with FB. Of course they are super excited. Who would not be if I was able to participate on the pre-IPO price of $26 (which is where TWTR closed the day prior to the IPO).
The stock managed to go as high as $50 the very next day! It was shy of FB’s high IPO high that day of $45. As we all know FB proceeded to make a low price of $17.55 just a few months later (not too cool if you were the retail investor).
In the case of TWTR, the retail buyer came in at $46-$50 only to see the stock close at $41.65 on Friday. Believe me there will be many opportunities to participate in this stock down the road! Who knows where it may settle before the professionals seek to buy it again.
V (Visa) was another example similar to FB and TWTR. This one was slightly different in that it took three months to attain a high price of $86.96 only to drop to $40.58 in the next eight months. Of course it is now $198 which goes to show that it is best to allow the stock to be traded for a while, enabling us to gain vital fundamental data that capitalizes on the stocks potential going forward.
Of course we are not saying that a stock’s IPO will always cause the stock to go down in price. In the case of MA (MasterCard) you can see that the stock went public in 2006 and was catapulted to $300+ in two years without revisiting their opening price of $39.42! However you can see that the tendency is for the stock to selloff before they settle down.
Best to wait!
I read a book many years ago regarding warning signs that the market may show and while there were way too many to be even slightly reliable I do believe that this warning sign carries enormous weight – especially when I can see what transpired many years after the book was written.
As we all know when we open a brokerage account we have the option to have a margin account. That means that when we buy stocks, the brokerage house will match our funded account which enables us to buy stocks at a discount. I myself do not use margin since we need to pay the interest and in the event the stock drops in price we will get a margin call.
However this is a very common practice among many investors and the consequences of a dropping market, propped up by lots of margin can lead to very adverse stock market price drops.
I did a Google search for “NYSE margin debt” and was able to share with you how once margin debt exceed previous margin debt with a rallying market the market has gone into an amazing slide.
Of course this does not happen the very next day. We were able to see that there is approximately a six month window of time.
When this market drop begins realize that the potential for amazing profits (unprecedented profits for some) will be more than welcome!
Following is a graph from the Google site that shows margin debt reached all-time highs March 2000 and July 2007 which coincided with the markets reaching their highest levels (for those times). We are really close to taking out July 2007’s highest margin debt.
Again generally the markets have a tendency to rally into the New Year so we shall trade what is happening and not what we think will happen!
Just as I began to put together this article I received an email from a company that indicated “The Great Crash of 2014.” Of course it was the same company that began last year with “The Great Crash of 2013.”
We all know how 2013 ended up – making all time high prices across both the Dow 30 and S&P 500 (the Nasdaq is almost 200 points from its 1 March 2000 highest price).
However we do know that markets do not go straight up in prices for years on end. There is, on the average, a 4-5 year cycle to the market that is being reached now in 2014.
How do we know what action to take at any given time?
Will we get warning signs without having to listen to market forecasters who have proven to not have our best interest at heart?
The $VXO has always been a really reliable measure of what is happening in the market place. That is like measuring “fear” in the market.
If the VXO is low, fear is low and the market is rising, if the VXO is going higher then fear is rising (investors are concerned about the potential to lose money being in bullish positions) since the market is now dropping in price.
The VXO comes in the form of a percent and I like to use the target prices below to enable me to know what is happening in the market.
When the VXO is low we can participate in the Investing style of trading (however the Implied Volatility (IV) on stocks should be above 27% otherwise the stock may not move very much in the timeframe that we are in it).
We can also participate in any other short term style of trading however our target will be 3% with a 3-4 day exit.
Investing After Earnings method is ideal however we must purchase both the Call and the Put option at the same strike price (also known as a Straddle).
Once the VXO begins to rise and goes into the high volatility price a Straddle may not be effective with this style of trading. It would be best to Strangle the trade. With a high VXO our short term trades can now target 5% with the same 3-4 day exit.
With the VXO at extremes we cannot place a stop loss. However we have something better then what we had the last time the market dropped like a rock (2007-2008) and that is weekly options! Now we can use these to protect our position where we will be in for 3-4 days anyway.
If you have missed part 1, read here.
What this means is that the market is getting ready to open for trading at a price that is lower than it opened. This is known as a gap (a space between the previous day’s closing price and the next day’s opening price).
On average 70% of all gaps will be “faded” or closed in the same day and the highest probability is that it will occur between 10:30AM EST and 11:30AM ET. Remember that I said 70% which means that not all stocks and/or indices will close their gaps the same day.
If I am in a bullish position and it is time to exit the trade and I see that the market is getting ready to open almost 200-points to the downside do not panic.
You can actually wait until 10:30AM EST (no later than 11:30AM EST) to see if the stock can close its gap (unless of course the Stop Loss was triggered at the open).
The Trading Session
As you can see on the following chart the SPY opened lower (as we knew they would) however you can see something pretty amazing! That by 10:30AM EST to 11:30AM EST it was trading positively from where it had closed the previous day (gap was closed). That is the opportunity to close out the bullish position.
The S&P future were negative 26-points so that would mean that at some point during the trading session the SPY would trade down 2.60. It had closed at almost 165.80 so a 2.60 move down would be 163.20 and it took the whole day to get there.
That is why people can’t believe that the market can be so positive one minute and then be so negative by the end of the day – they don’t understand the correlation between the market and the futures. Obviously when the futures are positive or negative by very small amounts this can happen at the open very quickly and it is almost unnoticeable.
The New Media
I talked extensively about the role of the news media and now you know what to expect. I think that this was a hard one for me to conquer however once I began to see the news media for what it was I felt completely liberated and free to make up my own mind as to how price and time are the only true indicators of what is happening in any market.
Today we will discuss about pre-market activities and how to know how the market will open, the potential direction for the day and how to manage a position.
The stock market closes for trading at 4:00PM EST although trades can still be settled after it closes. There are orders which are designed to trigger when the market closes (Market on Close orders). There are also options (e.g., QQQ which may be traded up to 4:15PM (when the futures market closes for the US trading session).
The futures market then opens for trading at 4:30PM EST on the Globex (or Global Exchange). Depending on how that market is traded around the world during the US evening hours depends on how the futures will open for trading the next day.
A positive futures market (considering fair value) will mean a positive open and a negative futures market (again considering fair value) will mean a negative open for the market. We now have a glimpse of how the market will open for trading that day.
If I am already in a shorter style of trading for a few days, I can use this information to enable me to time my exit.
Pre-Market Activity 31 May 2013
I took a snapshot of the premarket activity for 31 May 2013:
As you can see we were in for a very rough market open! The $INDU futures were negative by almost 200-points. It traded very negatively overnight and we now know that at some point during the next trading session that the cash index (which opens at 9:30AM EST) would be trading at that price.
What this means is that the market is getting ready to open for trading at a price that is lower than it opened. This is known as a gap (a space between the previous day’s closing price and the next day’s opening price).
To be continued…
Here we go again.The market has been experiencing a bit of a drop and while news to me always takes a backseat to my ability to make a trading decision without it this is one event that I will not be ignoring.
The US government shutdown — what does this mean to us?
Last week the US government furloughed approximately 800,000 government workers (of that number about 40,000 were called back to work since they are in the area of defense).
The bigger picture will come next week when a decision to raise the debt ceiling (again) or for the first time ever in the US default on its interest payments to government bonds that have been issued to individuals, corporations and other countries. Oh boy.
Because of the uncertainty of the outcome of the serious market impact I recommend that we not take directional trades. I recommend that we be hedged in all of our positions at least until 17 October 2013 when a decision needs to be made regarding the potential default.
May everyone have a safe, pleasant, blessed and prosperous trading week!
I am back in Asia right now to conduct the live trainings… how cool is that!
Here are photos of my beloved members from the July 2013 batch:
MALAYSIA JULY 2013
SINGAPORE JULY 2013
Today, I like to share an interview that appear in The Standard newspapers:
Smart investors wanting to understand financial risk can learn from Wealth Mentors.
To Wealth Mentors, risk equals opportunity to gain more than you expected through smart observation and expectations of how market will react.
“Basically, we have different styles of investing,” said Mirriam Macwilliams, the Chief Trainer of Wealth Mentors.
To smart option investors, profits generated from the stock market are seldom affected by the ups and downs of the market.
There are two types of options, “call” and “put” which allow options investors to make money both ways.
When a stock is expected to rise in price, people will buy “call” options on it. On the other hand a “put” option will see its options price rise as stock prices plunge.
The next question is: How can we estimate the movement of the stock market?
“Investors should look at these volatility segments which will provide better guidance and the necessary analysis”, said Aaron Sim, the Founder and CEO of Wealth Mentors. “The conventional method of protecting your funds will not be applicable in a highly volatile market. Therefore, traders must be able to hedge their position in a more mechanical fashion.”
In fact, options investors have the advantage when trading in a falling stock market over others who have no protection.
“Another advantage of options is that you can protect your funds through hedging in a highly volatile market. Not only can you minimize your risks, you can possibly profit when you are wrong in predicting your direction,” said Aaron.
“Hedging may sound rather complicated for beginners but with the right education, this can be executed through simple mechanical steps,” added Aaron.
Wealth Mentors encourages members starting out, to hone their skills through virtual trading.
“The downturn is most of the time caused by human emotions as I take on more risk,” said Aaron. “This happens after I have captured the profit which allows me to take on more risk than usual. But beginners take more risk even before the profit comes in. Such downturns hurt their confidence.”
“That is why virtual trading provides a safe haven for newbies to practise. Human emotions must be dealt with and it is useful for traders to explore their emotions and familiarize themselves with the rules during virtual trading.”
Investors, especially beginners, might think it is not a good idea to enter the market when it is falling, but Aaron and Mirriam are thinking outside of conventional wisdom.
“It is always a good time to enter the market,” said Mirriam, “but it is important to get educated and prepare ourselves for more challenges. Individuals have to understand the market sentiments which cause high market volatility.”
“The market is not a place for individuals who are just pouring in their money without a step-by-step trading plan. Before taking up a trade, you must already calculate your numbers to know when and how much to exit”.
“The stock market is a good place to generate wealth, be it in the bull or bear market, but the investors need to be informed.” Mirriam concluded.
If you have a desire to master money-making as a trader in the stock market, and you have gained the knowledge of a proven system, all you need to do is follow the rules.
Apply the rules, gain experience, get some coaching to learn from your results – you’ll be well on your way to being a successful trader.
Here I like to share with you my take on what makes a successful trader:
1. Have realistic expectations
Huge percentage gains have high risk. 1,000%+ windfalls every now and again is not the path to success – such trades are very risky. Look to trade in a consistent way to yield frequent, consistent profits. Instead, a 10% move on the stock in the US is a realistic, achievable result, and can yield you a 100% return on your investment capital through options.
2. Have a Trading Plan
Use a clear system of strategies and trading rules that is structured, consistent and proven. Stack up the probabilities in your favor by having a plan and using it every time you place a trade. Have a watch list of stocks of about 20-25 that you work with – review the position of each stock in the basket of stocks each trading day. Also, avoid trying to “cherry pick” the top and the bottom of a stock’s movements – that can be very uncertain. Instead, look for the more identifiable 10% “middle” moves of a stock that can produce a 100% profit on the options.
3. Ignore hot tips
Know what the company does, understand the numbers, and make an informed decision. Don’t go into a stock just because it seems like everybody else is and you feel you don’t want to be left behind – that’s “following the followers”, who are often wrong.
4. Have trades in several industries in different stocks
Having your entire investment capital in the market in just a few stocks in the same industry can be a recipe for disaster – one trade or the industry going the wrong way can wipe you out.
5. Understand the risks associated with options trading
Approximately 70% of options trades lose money! That’s because many options traders do not use a proven, low-risk system to deliver them solid profits consistently. They let their human emotions get in the way. Learn how to eliminate the risky trades first before settling on the potentially good ones. Don’t just put some money in the market when it opens and hope some of it comes back. You can overturn the overall statistics and have 70% of your trades or better go your way and deliver you success if you follow a proven trading system.
6. Use a “Stop Loss”
A small percentage of your trades will go against you, even when you follow all the rules. Nobody will ever be 100% accurate. A Stop Loss is a live, working order that will trigger if the trade goes against you, leaving you with the majority of the capital you placed in the trade. It’s one of the methods for managing risk, like a safety net – if the trade goes against you, be out of it as soon as possible with the minimum loss. Automate your trades – don’t let your emotions make you hesitate. Prepare for a potential loss before you go into a trade. If you focus only on potential profits, your results will be weak. You need to assess your potential losses first, and your account will grow.
7. Automate your profits with a “Sell Stop”
Success in trading is not based on your ability to watch the stock market for several hours each trading day. Similarly to a Stop Loss, calculate and set a “Sell Stop” at your target price so that your position is automatically sold for you at your anticipated profit level without you having to be in front of a computer. This means you only need to monitor the market for 20-30 minutes a day most days, adjust your stops if necessary, then switch off your computer. The best strategy is a hands-off one so that you’re not concerned with moment-to-moment fluctuations that can stir up your emotions and end up making loss-making decisions. Make money while you’re asleep!
Even after sequential gains, Smart Traders avoid the temptation to violate the rules – the very formula that delivered them their success.
Some people feel so “bullet-proof” after early success that they start to cut corners with their trading plan. For instance, they put their entire investment capital on the line in a risky trade without stops – this often leads to an absolute disaster by losing all their money.
Panicking about losing your money is also an unreasonable extreme – have a healthy respect and aversion for losing money, so that you are more inclined to be cautious in your trading style.
Be self-disciplined so that you continue to follow the rules no matter what.