Sunday, September 18, 2011

Nasdaq Velocity and Forces is the New Level II

Maybe I've been in this business too long. There was a time when level II was revolutionary. Even in the early 90's only a few people had it, and they had a huge advantage over people who didn't. When I was learning to trade in 1994 we would watch level II data and try to follow GSCO and MSCO and MLCO and HRZG and JEFF. In those days Market Makers had to be good for 1000 shares on the best bid and best offer. You could see bidders coming in and offers stacking up and take advantage. In 1997 ECN's like ISLD and INET got in the game and the advantages started to fade.

Before Trade Ideas, in what we now call the $50 Million Dollar Education (Thanks Menlo Ventures) we were building a trading platform to compete with REDI Plus. I visited a lot of potential customers. By this time everyone knew what level II looked like. Two of the most popular customer questions were

1) How can I see it?
2) How can I hide my orders so they don't show up?

Please take a second to think about those two questions together. Everyone thought they were the first to use this tool, when the tool was in fact already well established. If you're new to it, and you can figure out how to fake it, then what makes you think any of it is real? Below is from one of our market data feeds.

The chart below shows how many quotes it takes to get $10,000 worth of stock traded in the U.S. for any point in time during the trading day over the last 4 years. Higher numbers indicate a less efficient market: it takes more information to transact the same dollar volume of trading. Quote traffic, like spam, is virtually free for the sender, but not free to the recipient. The cost of storing, transmitting and analyzing data increases at a higher rate than its rate of growth: that is, a doubling of data will cost significantly more than twice as much.

This explosion of quote traffic relative to its economic value is accelerating. Data for September 13, 2011 is the thicker red line that snakes near the high. There is simply no justification for the quote traffic that underlies this growth. Only the computers generating this traffic benefit when they successfully trick other computers or humans into revealing information, or executing trades. This is not progress. Progress is almost always accompanied by an acceleration in efficiencies. This is completely backwards.

And to anyone who might say: "To my knowledge there's been no proof shown that high-frequency trading has been detrimental.", we'd like to submit this as exhibit A. We think that a 10-fold increase in cost would be considered "detrimental" by most business people.

And that's just what's on the surface. I've read multiple articles like this. There's just a tremendous amount of traffic out there with no obvious value. The number of quotes keep increasing as the value decreases.

The article suggests malice and fraud are behind the explosion in bandwidth. My experience in technology suggest something far more banal. There is a saying a fool with good intentions is more dangerous than an enemy. How many people wanted a piece of high frequency trading but didn't really know how to get there? They hire a cheap, inexperienced programmer, and they produce a lot of activity. But they aren't really doing a good job. How else do you explain all of those quotes that are pegged to exactly 50¢ from the best bid or offer? What good could really come from constantly updating those?

That's why we're investing in something new. We've always liked the last and the NBBO because they are fast and they are real. Now we also offer NASDAQ Velocity and Forces data. Like level II used to be, this is the way to see the orders before they happen. Unlike level II data these orders are real. While there is no such thing as the Holy Grail in terms of predictive value this is the best way to gauge the real market sentiment, as quickly and accurately as possible.

Please check out our new alerts and filters.

Thursday, September 15, 2011

NASDAQ and Trade Ideas Power Punch

We gave you hints that behind the scenes, work on one of the more powerful innovations to hit the trading markets was happening. Today we released Nasdaq Velocity and Forces data completely integrated as alerts and filters inside Trade Ideas. Why is this such a big deal?

This is pre-trade data. This is orders coming into the system before they are executed!

Put another way: Velocity & Forces data inside Trade Ideas allows you to scan the whole market for buyers and sellers versus just price action and trading patterns.  Imagine you could color code those traders in the iconic images of them in the pits and automatically tally which trade direction they were about to take before they started shouting.  Buyers or sellers - which is the larger group?

NASDAQ recognizes Trade Ideas as the first and exclusive tool in the whole world to use this technology and now it's in your hands. Patent pending.

You can combine existing Trade Ideas alerts and filters with Nasdaq Velocity and Forces data to your search. For example show me a channel breakout with large number or buy orders or a channel breakdown with a large number of sell orders! There is almost an unlimited way in which you can slice and dice the data to give yourself the ultimate advantage.

Here's an example strategy we posted in our support forum:

This is a one of a kind technology and if you are even remotely trying to get some edge you should be looking at this data in real time!

Here are the definitions of the alerts and filters based on NASDAQ Velocity and Forces data.

Sunday, September 11, 2011

Quantalitics The Shape of Things To Come

When the going gets tough the tough get going :-) Everyone who is involved in any kind of trading for income knows that recently the game has been challenging. Very rarely are professional endeavors easy but lately the market has been especially tricky. Why is that the case? There are several reasons:

For starters traditional metrics that measure price action are terribly antiquated for today's tape. Remember that indicators like the RSI (Relative Strength Index) were created over 40 years ago. Japanese Candlesticks go back something like 1000 years. These same indicators are present in every major chart package. The problem is while these indicators have some informative value nobody is giving you tools that help you understand and what to do with stocks when certain indicator scenarios present themselves.

The feel. In sports it is called the zone. It is when all planning is put to the side and you execute the game plan. It is the reason that a Stanford or Harvard MBA does no good in the trading world. You can't just write an equation to solve the market alpha problem. You have to get a feel. The market is a reflection of our collective conscious. Support and resistance lines are just areas that attract your eyes. You have to figure out what to do when the time comes and that is not easy.

The problem with feel is that it us usually a direct derivative of bloody noses. I learned how to trade through over 15 years of making mistakes and dealing with the types of emotions that come up when you are hit hard over and over and over again. Part of my fortune is timing. I learned to trade at a time when the market was in a formative phase 94-98. There were mechanical advantages that existed that no longer exist today. Nonetheless all of that served to help me get the feel. Now we are working to mold our software in such a way as to help you get the feel faster.

People all over the world are doing the same exact thing. Watching the S&P, watching the DOW, watching Gold. People watch that on various time frames. If you are looking for an edge doing the same exact thing that everyone else is doing I have some bad news for you, it's not going to happen. You have to do something different. When Tiger Woods came on the scene in golf and started lighting up tournaments people in the golf world started to examine what Tiger was doing. What they found was that Tiger practiced differently from most other golfers in quantity and quality. Plus he spent an enormous amount of time at the gym working on the physical body to help him get swing results.

That brings us to Quantalitics. Quantalitics is data stream like no other. It takes our proprietary data of intraday price action combined in a proprietary way with our statistical volume analysis and gives the viewer a stream of green and red pulses that goes right to your subconscious. Your mind's eye sees this data and starts to interpret the data as a barometer of price action. Since everyone else and their grandma is not looking at this stream you have an edge because you are looking more at the internals. Thins like 10 minute and 30 minute and 60 minute highs and lows that are taking place with a certain type of volume.

The second part of the feel is to run through 15 years of day trading without the 15 years. In all of trading software there is only one option that is available that will let you accomplish what I am talking about and that is the OddsMaker Do yourself a trading favor and just watch this video. It will be the best time investment you can make for your trading career. Put the OddsMaker and Quantalitics together and you have the best one two combination for capturing alpha in this challenging market. Take a look at some of our recent videos on how I am doing exactly that which I write about in this article!

Sunday, September 04, 2011

Golf and the Art of Trading

I would like to draw your attention to the similarities between success in golf and success in trading financial instruments. Mental specifics involved in properly executing a golf swing and shooting a low score are almost the same as they are in executing a trade, managing risk, and taking profits. If you allow yourself, you can take advantage of the mental training aspect of honing your golf game to significantly improve your trading results.

The Swing:

One of the more difficult aspects of executing a golf swing is understanding that the act of swinging a golf club to send a small white ball at an intended target is subconscious. What does that mean exactly? High level it means there are so many parts in motion the human brain simply can't consciously control all of them at once. When the brain tries to control the varied aspects of the swing during the swing, disaster happens and you hit terrible shots. In order to swing the golf club well you have to give up that need to control your body. You have to ask your body to swing it the right way and hope that it is listening.

Bad Preparation:

Giving up control is not as easy as it might seem. Not only is the act of hitting the golf ball completely different from what people expect, high handicap golfers have terrible practice habits. These facts are well documented and researched by the PGA. Weekend golfers tend to get ready for a round of golf by hitting many balls at the range. This is called grooving a swing. After a little bit the ball starts to do the right thing and they are able to repeat this swing. However, as soon as they get to the golf course to play and keep score they become very frustrated when their tour-level range swing does not seem to ever come out on the golf course. Professionals practice to score. Instead of banging away with your driver for an hour like the amateur a professional has a specific practice routine which usually means spending the most time on the putting green where they score!

Fixing the Wrong Problem:

Finally, most high handicap golfer suffer from "Paralysis by Analysis". They attempt to think their way through the golf swing focusing on the mechanics. Is my wrist hinged? Did my head move? Did I shift my weight laterally? This type of thinking is a kin to being stuck in quicksand. The more you think/struggle the more you get stuck.

The Solution:
If you want to score well in golf, and it is not easy, imitate what is done by professionals. They approach the game differently, they practice differently, and that is why they get results. We will discuss the solution more as we delve into the trading similarities.

Placing A Trade:

The act of placing a trade, means committing capital and getting your stock or option or ETF or whatever instrument you are trading and then hoping for the optimum result. That instant in which your finger presses the buy or short sell button is akin to swinging your golf club. Buying 200 shares of AAPL as it comes into a level of support and trying to play the bounce for 4 points is similar visually to driving a golf ball 290 yards down the middle of the fairway with draw spin. So how do the pro's do it? In golf, the professionals see the shot and shot shape before they take a swing. They visualize very clearly what they want to take place. So just like a professional golfer if you want a good trade you have to visualize it. See yourself placing the trade and seeing the P/L and watch yourself taking profits. Once you place the trade you must come to terms with a simple fact. Actually you have no idea what will happen. Most amateur traders just don't want to admit this simple fact. Nobody knows the future. So, just like the pro's in golf you have to visualize the desired result but have confidence that if the desired result does not happen you will be able to recover.

Bad Trading Practice
There are two common camps of amateur traders when it comes to preparation. Both produce poor results. The first group practices by paper trading. They spend countless hours sitting in front of a computer playing the market without any real money at stake. Much like the range golfer the paper trading master gets pretty confident after seeing the paper profits pile up. Also, just like in golf the paper trader becomes frustrated quickly when paper results never translate to actual similar returns when real money is on the line. If you want to take the paper trading approach and apply professional golfing rules to it here is what you have to do. Practice losing. That's right, practice losing. First know exactly what you are willing to lose on the trade, then get in front of your paper trading terminal and take your losses over and over and over again. This is like the professional golfer putting. Get good at getting out quick for a small loss. Forget winning trades when it comes to paper trading. This practice of losing small often is what will give you confidence when trades do not go your way. Taking small loses properly is where you as a trader score.

Trading Over Analysis
The second group of amateur traders has a hard time just pulling the trigger on a trade. To them all of the magic elements such as RSI, EPS, PE, SMA 200 and 50 crossing over and whatever other stuff they believe is predictive must take place. They pour over SEC filings and Blogs about this and that. This group of traders needs to believe that they have the "Right" set up. It is a very dangerous type of thinking because believing that you are correct makes it almost impossible to do the proper thing and reduce risk when the market goes against your analysis. Imagine if Tiger Woods could only hit the ball if it was nice out with no wind. It might work well on a simulator but in real life you have to be prepared for the uncomfortable. Professional traders try to avoid putting so many unnecessary burdens in front of their success. They can trade in either direction simply getting out of trades that don't go their way until they catch the right wave and ride it to alpha town.

In Summary:
I like to keep things simple so I will boil it down to this. Visualize and practice. Vizualize the good result you want in a trade and practice over and over doing the right thing when the wrong thing happens. The wrong thing will happen a lot! If you have any doubts about the value of visualization and how it can help your trading Google "Jack Nicklaus Visualization". Jack Nicklaus is the greatest champion in modern day sports. He did not get there by thinking about the mechanics of his golf swing.

Why Trade Ideas
You have seen me post videos of how I use Trade Ideas and how I place trades. You have seen my P/L. The best golf analogy for Trade Ideas is that it helps me with my course management. In a round of golf, many amateur golfers pick the wrong club and don't know their distance to the pin or the hazards. Trade Ideas is like a golf GPS with caddy tips. I use it to find shapes of movements that appeal to my trade vizualization. I also use it to gauge strength and weakness much like a golfer might throw some grass into the air to see which way the wind is blowing. I use the OddsMaker like a driving range on steroids. I am able to practice my shots more efficiently as I am able to run through more practice rounds than is possible if I was just paper trading. I trade professionally and if you follow these tips so can you!