In this week’s issue:
Strategy of the Week
Stocks That Meet The Featured Strategy
Currently, approximately 40% of the trading volume on the New York Stock Exchange is executed by a computer. That means a human being is not involved in the trade, at least not once the trade criteria have been programmed in to the computer.
There are two main reasons why computers are used to trade the market. First, computers can execute trades much more quickly than humans and second, computers are not emotional.
Computer based trading is typically referred to as algorithmic trading. The computer looks for the criteria it is programmed to find and then executes the trades with lighting speed. Using complex event processing software and ultra low latency data feeds, these orders are often executed in micro seconds. For scalping type strategies (where traders take advantage of bid-ask spreads and action gleaned from the Level 2 screens), humans don’t have a chance.
But algorithmic trading is not reserved to scalping strategies. They can also be used to execute on a set of rules that may generate trades every few minutes, hours, days or weeks. For these less time sensitive strategies, the real benefit for the computer driven trade is the absence of emotion.
We humans tend to take good trading strategies and screw them up because of our emotional attachment to money. The more we risk, the more emotional we get, the more likely we are to break one of our rules. Trading is hard for most people because of this emotion.
Should we all aspire to program our trading strategies in to a computer so that we can restrain our destructiveness over that strategy? I think it is a great goal but one that I think is hard for most to achieve.
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In recent months, I have gone through my trading strategies and made a real effort to reduce all of the rules for entry, risk management and exit down to logic. Logic has no rule for interpretation and can be entered in to a computer as a set of rules to be executed without fail. If you can have a winning strategy entirely based on logic it is possible to have the computer work for you all day while you do more enlightening things.
The one area that I have not been able to replace judgment with logic is in the reading of chart patterns. With practice, I am able to look at a chart pattern and know what my probabilities of the stock going one direction or another. I try to describe my interpretation with a set of rules but I have not been able to take those interpretations and describe them mathematically. My read of chart patterns is not yet ready for the computer.
There are companies who do run computer programs to identify chart patterns and I am amazed at how the plot those patterns with the computer driven lines. However, when I look at what they define as an ascending triangle pattern or a head and shoulder pattern, I have a hard time agreeing. The computer seems to be able to get it 80% right, but that last 20% can make a big difference between a winning and losing trading strategy.
Many have said that computers will eventually make all of the trading decisions but I don’t agree, at least not in their current form. Humans, with experience, have an ability to interpret the market’s action and adapt in ways that computers can not.
While I am not ready to replace myself with a computer, I am willing to farm a lot of the judgment out to one. Risk management and the exit decision are now entirely logic based for me, it is only the entry decision that still requires a little human touch.
Aspiring traders should put their learning effort in to reading chart patterns, spending time looking at the charts of stocks that have trended well and study how the looked early in the trend. I have spent 20 years doing that and can just tell when a stock has good potential. It is an art, meaning that success is not assured, but with practice, the art of trading can be applied to make some good money.
When I teach people to trade, we now focus on breaking that art down in to a series of skills. Each skill is relatively simple, putting them together to have a good result is just a matter of practice. The more you practice, the better you become and the better you can compete with the computers.
Weakness in the US dollar brought some buying in to the commodities, improving the chart of Oil. This helped the Canadian market more than most so I ran a Stockscores Simple strategy on the Canadian markets to try and find some trading opportunities.
Chart patterns are what I look for when analyzing charts. With practice, the predictive patterns can be found. Based on the results of the Market Scan, here are a couple of charts with good patterns making these stocks worth considering.
V.TME has had resistance at $0.30 over the past year but that was broken on Thursday with good volume supporting the breakout. The pattern in to the breakout is an ascending triangle pattern, one of the better predictors of future strength. Support at $0.27.
T.BIM broke out of a long term pennant pattern on Thursday with good volume supporting the breakout. Support at $0.57.
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Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.
Slowly, he began to learn how the market works, and more importantly, how to consistently make money from it. He realized that the stock market is not fair, and that a small group of people make most of the money while the general public suffers. Eventually, he found some of the key ingredients to success, and turned $30,000 in to half a million dollars in only 3 months. His career as a stock trader had finally flourished.
Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.