After being in the trading business for a few years and spending several hours of my week training new guys I can’t help but chuckle at one mistake I see all of the time. And I laugh because I know HFTs are printing money off this concept. And I see this happen to both experienced and new traders around the whole number, the quarter, the half and any other level easily identified in any time frame.
For this article I want to spice things up a bit and show you this spoof of what I want to call “The Magic Whole Trading System”:
First we have to set a few concepts in place. We buy a stock when we consider it to be cheap, and sell it when we find it expensive – you know buy cheap sell when expensive old school concept. Let’s take a look at the following graph:
The graph shows that a stock gets cheap right above the level (because we always buy in front of it) and expensive right below it (traders are taught to sell it right when it drops). And this happens for every single level, the magic whole, the magic half and even the magic quarter (and if the stock is slow enough, the magic dime). We are also monitoring a second influence; we have a theory that the more zeroes a number has the more significant the level. For instance, 60.00 is clearly more significant than 61.00. 130.00 is much more of a level than 13.00. And the Dow at 10,000… we can’t even comprehend that one.
A typical trading day using this system might look like this: Say the stock is trading 49.87 (obviously a meaningless number (no zeroes at all), but it’s the price you see when you first type it up. You might try a feeler trade here just out of boredom or impulsiveness. Then the stock comes up to 49.99. This is the most expensive the stock will ever be, so obviously you short it. Then the whole lifts and it is 50.03. You buy to cover your short since the stock is so cheap at this price… and the magic whole drops again. Now it’s 49.98. What do you do? Have you been paying attention?!
Obviously… it’s now VERY EXPENSIVE so you sell what you bought above the whole. Now it goes down a bit and you don’t want to be reckless since you just did a few trades, so you wait a while and probably short around 49.92 or so. It trades up to 50.00 and you pause to think about all the zeroes in this number and obviously you buy back the cheap stock and close above the whole as you can. This is a complete trading plan that you can execute the entire day as long as your buying power and stop loss limit permits.
For those of you feeling a little uncomfortable as I just dissected your trading system please stop being a piker. Man up and learn to trade!
Again, this is not a real profitable trading system, just in case you didn’t get my humor.
Gilbert “Gman” Mendez is the head trader at SMB Capital.