High Frequency Algorithms Tampering with the Tape & Chart Setups

The word on the street is that intraday traders are frustrated. The rules of the game have changed. Most high probability chart setups in between important levels are being manipulated by the high frequency algorithms. If you are an active intraday trader reading this, I guarantee you have been a victim to what I call the screw job program. Let me explain.

The highest probability trade for a well capitalized algorithm is the trade where it is guaranteed emotional order flow. By emotional I’m referring to the order flow that comes out of positions where traders just want out – our stop orders.

Consider all of the high probability plays: flags on strong/weak stocks after a drive, consolidation, support/resistance at important levels. We all trade them. We size up as the play develops in our favor and we trade them quite similarly when the play goes against us. We bang out of the stock when we assume we are wrong (especially when we have size).

Let me offer an example of a common screw job program. A stock drives on the open, comes off very little and starts to consolidate close to the high of the day on a tight range for a significant period of time. You can spot plenty of buy interest on the bid, the buying is clear. The stock spends so much time consolidating that the VWAP and moving averages start to catch up to the price action. You see a tremendous opportunity to “load the boat” with little risk on the consolidation calculating the stock has another leg higher.

The stock takes the top of the consolidation with volume and you add to your position. You know you are in the driver’s seat. I start the theme music to “Jaws”, and our desk’s group of traders I have affectionately termed the Shark Tank, communicating an excellent trading opportunity to the firm. Then out of nowhere there is more selling interest, the bottom of the consolidation drops and you bang out of the play. 15 minutes later the stock is making new highs without you in it. Talk about getting bitten by the market. Sound familiar?

Check out these charts of BAX to illustrate my point from above. One shows the intraday price action on a 3 minute chart while the 15 min and 60 min chart give us a clue of the upside of the play.

BAX Gman

I know I have been a victim to this screw job algorithm at least 30 times in the last month.  But lately I have started to catch up to their nonsense and have had to make some adjustments.

  1. Increase the stop loss on the position
  2. Trade with less size until witnessing the screw job then lay into the position when it gets back above the level.
  3. Stay light or flat on the setup, wait for the screw job and then add while the screw job is taking place. Then lay into the position when the panic subsides.
  4. Trade more in premarket and after hours when there are very few/no algorithms.

Dr. Brett Steenbarger once told me:  turn frustration into opportunity. Doing the steps above have helped me tremendously. Clearly the algorithms have some advantages but the trader who adapts will always come ahead. Happy trading!!

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