Wouldn’t it be great if you could find someone who spent all day watching each and every stock, listed or not, or option contact, and who knew precisely what the history of that security’s trading history has been, and who understands the current state and momentum of the market?
Wouldn’t it be great if that person’s sole purpose in life was to apply that knowledge to find buying opportunities and alert you to selling windows, with the assurance that their decisions had absolutely no emotion attached whatsoever? That it was all mathematics, algorithms on steroids?
Chances are that person doesn’t exist, and if she/he does, he’s already making seven figures for Goldman Sachs.
The Soul of The Machine
But what if you could find a machine to do that work? More likely, a piece of software that chews algorithmic sequences like candy and spits out trades that, chances are, will make you money each and every time?
Well, if you take out “each and every time” from that criteria, you’re in luck. Because those programs are out there. It’s just that you can’t afford them.
Yes, they’re expensive, hard to use and, because the stock market does find itself influenced by emotion and human weakness, not completely 100 percent reliable.
These programs – also known as algo trading, black box trading or robo trading – use all available data about the market and specific stocks to actually make buy and sell decisions. They are used by pension funds, mutual funds and other large institutional entities, often with portfolios on a scale that challenges any human minds to manage them.
The Machines are Taking Over
If you think this is just a small, sci-fi oriented corner of the market, think again. In 2006, for example, it’s been estimated that a third of all trades on US and UK markets were, in fact, executed by these automated trading systems, and before human eyes saw a single piece of data. And the trend says this percentage will increase.
The implications to individual investors include confirming the suspicion that the market is beyond anyone’s control. These programs are entirely data-based, without regard to the market forecasts of the companies whose symbols are attached to the stock certificate. This human factor is what trips up these programs on occasion, influencing buy and sell pressures that may translate to data, but only after the news hits the airwaves.
What About Us Little Guys?
Some vendors claim to have systems that individuals can use, as well. And while they may be based on the same algorithms and theories, they can’t compete with the massive systems employed by institutions.
Compete is the key work, there. Because the first trades in – those perpetrated by machines – are the least likely to be influenced by ensuing market momentum. This clouds the cause-and-effect nature of the markets, and thus, the ability of the individual to be first in line when a stock begins to move.
Which is why human intuition will never be programmed out the trading experience. Because if you can predict what the machines will do, you’ll be able to navigate in their waters.
When someone invents a program that can do that, all of us will be standing in line.
