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Smart Trades For the Computer Age
The Smart Profits Report: Issue #309
Tuesday, May 16, 2006
Smart Trades For the Computer Age: Maintaining Profit Targets
by Dean Albrecht
Advisory Panelist, Mt. Vernon Research
I’m one huge fan of the computer age.
As Lee Lowell mentioned in his last message, computers have completely revolutionized the investing age. New technology has allowed ordinary investors to get up-to-the-minute information, real-time quotes, and trade from home just like the professionals.
So, for someone like me, you can bet that I’ve also taken a big advantage of computers. I use them to crunch data, examine price movements and analyze patterns in a number of different ways, so that I can be assured of picking the right investments at the right time. The software I use acts as a radar that looks for buy and sell criteria in real time, and enacts the trades automatically, so you don’t even have to push a button. Basically, it screens, it loads, it tests, and it trades all on its own.
But with the good also comes the bad. You’ve probably heard all about the plethora of nasty viruses out there, as well as computer hackers who try to crack the firewalls of banks, corporations and government agencies and steal people’s identities.
We know that computers have a hard time thinking and putting the past and future together and making decisions. As far as artificial intelligence goes, there are still gaping holes in this process in many fields. But you can still avoid them…
Never Show Your Hand… In Poker Or Your Trades
My online poker-playing experience is a good example of “gaping” holes in technology advancesments. BOTS - as they are known - are computerized programs that play poker ’round the clock in online trading rooms.
They most often work in smaller limit or lower limit tables, taking advantage of inconsistencies of inexperienced players or preying on the fear of new players. More experienced players will actually switch up their game, which makes it more difficult for BOTS to be successful.
Also, programmers may deploy several aggressive BOTS at a table that will scare out or force out smaller players who get spooked easily, making them leave small amounts on the table. Over time, this adds up to significant amounts of money.
Conversely, in trading circles, traders can watch the tape and see where the action is. Some traders will do their best to fake out other traders and post large orders on the buy side to move a price up, or on the sell side to scare traders out of a stock.
In addition, it’s a common occurrence in trading rooms for traders to pile into a stock and move the price significantly. And it’s well known that market makers can see where all the stops are, and they will move the price of an investment down to get rid of them before moving the price right back up. Hence the reasons why many an analyst advises using a mental stop rather than a hard stop that is totally visible to a market maker.
So how does all this relate to making more money in the markets or learning how to do so?
- Understand that you are not just trading or competing against other humans. Now, you are competing against the decision-making capabilities of computers, as well.
- It doesn’t make sense to show your hand. You should play your positions and your intentions close to the vest. Understand that computers aren’t emotional and you can even take advantage of situations when prices get too far out of line.
Also, watch where you put your stops and don’t be too predictable if you are posting orders. Protect your profit targets. Don’t get scared out of a trade just because some size comes into the order. Stick to your convictions with a sound strategy, and you should do well.
Good Trading,
Dean Albrecht
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Today’s Smart Profits Cribsheet
- Want to know how you can get the best price when you sell your options? It’s not as hard as you might think - at least not when you follow our handy guide.
- As always, don’t forget to check out the Smart Profits Glossary for definitions of words like “market maker” found in today’s article.
Related articles:
- Time Stop Strategy: Your 10-Day Profit Test
- Beating Market Makers on Price: Patience is a Virtue
- Limit Prices: Tip the Odds on Options Trades in Your Favor
