Trading With Jeet Kune Do (Part 1)
Wednesday, June 2, 2010 at 12:51PM Beat Those High Frequency Traders
Let's face it. We little guys are at a significant disadvantage compared to those institutions that are paying millions of dollars to put powerful computers on the trading floor. Not all of us can attend fancy online MBA programs. Likewise, we don't have all the financial resources in the world at our disposal. Miliseconds of time saved translates into billions of dollars in profits for Goldman Sachs and other High Frequency Trading (HFT) companies.
Now what would Bruce Lee do? According to Bruce, relying on a weapon in combat, any weapon, is a limitation. It is a limitation because it prevents you from using other techniques that may be more effective in downing your opponent. Likewise, HFTs using computers are limited. They are limited to pre-programmed algorithms that are only as good as the programmer. These HFTs also deal with large amounts of capital, much more than us little guys are handling. The limitations of HFTs became readily apparent with the recent Flash Crash where some select stocks were going for pennies on the dollar.
So how can the little guy capitalize on HFTs? Well, I recently discovered one phenomenon that may help. Late in the day (after 3:30 Eastern Time) is my favorite time of day - this is when major swings often occur. This is particularly the case during extermely volatile times (such as now). Often when there is a significant gap down at the opening bell it translates into a major sell-off late in the day. I suspect this is due to mutual fund redemptions. People panic and sell their mutual funds. The adjustments are made by the mutual fund company at the end of the day. They can't avoid it.
By studying late-in-the-day trading I found a very simple S&P500 market characteristic that I would like to share with my readers. It is quite simple and powerful - all you have to do is watch the last 15 minutes of trading prior to market close, from 3:45 to 4:00 PM.
By studying the last 6 months of intraday data for the S&P500 index I found some simple rules that vastly improve the odds of success for day trading. Here are the rules:
First lets define the parameter %DeltaIndex which is the index percent change over the last 15 minutes of the day.
%DeltaIndex = 100 * (Index at 4:00 - Index at 3:45) / Index at 3:45
In English, the rules would be as follows:
(1) if %DeltaIndex is small (i.e. less than +/- 0.33%) then continue with the trend established in the last 15 minutes.
(2) if %DeltaIndex is large (i.e. greater than +/- 0.33%) then reverse the trend established in the last 15 minutes.
Mathematically the rules are written below:
(1) If %DeltaIndex > 0% AND %DeltaIndex < 0.33% Then Go Long
(2) If %DeltaIndex >= 0.33% Then Go Short
(3) If %DeltaIndex < 0% AND %DeltaIndex > -0.33% Then Go Short
(4) If %DeltaIndex <= -0.33% Then Go Long
If you were to buy (or sell) the index at market close according to the above rules then you would capture about 30% profit versus the index over the last 6 months as shown in the graph below.
It isn't practical to buy at market close while making the above calculations. You can however anticipate the closing index value and probably make a good return doing so. Alternatively you can buy (or sell) at the next market open and still realize approximately 90% of the returns.
I am currently doing some (proprietary) experiments using the VIX chart to predict the next day's stock market action with even better results. By 50%!! I'm also in the process of ordering several years of intraday data so I can further my research.
Stay tuned and be happy. Don't let the markets get you down.
Steve
Reader Comments (6)
Great blog.It's amazing how much can be learned by sharing mutual expertise. day trading strategies
I'm going to give this a try. Rather than trying to trade while calculating, I'm going to try this.
Target.33%+ = 1.0033 x Index@3:45
Target.33%+ = 0.9967 x Index@3:45
This way, I know what my 4:00 target is at 3:45. If the market stays between +/- .33% that's time to go short. If it looks like i'll easily pass .33 positive or negative, it's time to go long.
What do you think?
John
I appreciate your post, thanks for sharing the post, i would like to hear more about this in future
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Feel free to post your comments
Regards
SHARETIPSINFO TEAM
Dear visitors,
This blog is an gold mine of information for new stock market investors and students who want to learn about stock market.
I am an technical analyst providing Stocks to Buy Tips and Intraday Tips for Indian Share Market.