11 Tips to Beat High-Frequency Trading Algorithms

by Rick Ackerman, trader and former San Francisco PSE market maker

Think it’s impossible to beat high-frequency trading algorithms at their own game?

Think again. The prop-desk whizzes at Goldman & Sachs, Morgan Stanley, Citicorp et al. are barely making money these days. Even the Houston Astros are having a better year. The reason is simple: With so many rocket scientists in the game, the mathematical edge in trading has been chopped, sliced, diced and winnowed down to nearly nothing.

This spells opportunity for traders who think like traders rather than like mathematicians. Understanding the psychology of trading is something the machines have yet to master. This means you can beat them by out-thinking them.

How?  The thing to realize is that winning trades seldom come from the psychological comfort zone.  Indeed, you better “Look out below!” when a stock has been rallying for long enough that bulls are brimming with confidence.  Conversely, when a stock has been falling for long enough that most investors throw in the towel, that’s when the true contrarian, ignoring the grinding in his own stomach, must step in to buy ’em aggressively.

Keep the above in mind as you consider the following:

1. If it seems too easy or tempting to get long or short, do the opposite.

2. Distrust weak rallies that occur after stops have been run beneath a previous low.

3. Don’t simply bail out of a terrible trade; reverse the position quickly and go with the flow.

4. Look for the bull or bear trap in every enticing trade set-up.

5. Wild price swings driven by news or events paradoxically tend to produce precisely predictable highs and lows. Find a technical system that can identify them, and stick with it.

6. Shun breakouts unless they are so subtle that the computer whizzes will likely have missed them.

7. The trend is not your friend, as the saying goes; it is your enemy, since the more mature a trend, the more devious and evasive it tends to become.

8. Nothing enhances a trader’s horse sense and timing like taking a small partial profit early in a trade.

9. Never settle for less than $3 in gains for each $1 you’ve put at risk.

10. Don’t initiate a trade without a clear escape route and a plan for taking profits.

11. The easiest trade of the day will often be in the opening minutes, when everyone is waiting for the dust to settle.

Interested in learning even more detailed strategies to beat high-frequency trading algorithms and manage risk effectively? At Rick’s Pick’s, I will show you how options trading can not only be profitable, but fun.