Don’t Let the Computers Beat You

06/26/2012 10:35 am EST


Adrian Manz

Co-Founder and Daily Contributor,

High-frequency trading (HFT) has forced retail traders to adjust, says Adrian Manz, who shares the adaptations he has made to stay on the right side of the markets and dodge the computers.

Our guest today is Adrian Manz, and Adrian, has high-frequency trading (HFT) really affected how you’re looking at the markets and how you are finding opportunities?

It’s definitely affected the nature of the opportunities that we find. Everything that I look for is based on price action on natural occurrences in the market. I don’t use any indicators.

I’m not really looking at anything other than price and volume, and the way that I set targets and stops in the markets is to look for natural support and resistance in the same time frame that I’m trading.

So for instance, if I’m trading intraday, I’m mostly on five-minute charts, where I’m going to set my stops, and then I’ll bump out to daily and weekly charts to set targets.

What’s happened since the advent of HFT is those targets have been progressively narrower. So it used to be that I would be looking for $0.90 on a trade; now I’m looking for $0.40.

What’s the difference? Well, when you’re in those trades and you see what’s happening, the very first little level of support or resistance that you get to, all of a sudden you see these guys hitting the tape. So why would you fight it?

We’ve always been in the business of trying to stay on the same side of a trade as the insiders, and this is really no different. You’re just trying to anticipate what the HFT guys have programmed, and the patterns that we’ve been trading have always been focused on that same type of trade, so it’s just an adaptation and you’ve got to start with a little bit tighter profit target.

Alright, so if the profit target has gone from $0.90 to $0.40, does that necessarily mean you’re going to try to increase your share size to try to make a little bit more of that profit?

Not necessarily. It depends on what’s going on in the markets in terms of volatility. If we’ve got a trending market with a mean-reverting Volatility Index (VIX), for instance, then we’ll increase the position size. We might double the position size on some trades.

I’ve got some trades that occur very infrequently. One is called a sinker. That’s a 52-week-high reversal over time that’s been 90% profitable, but it doesn’t come up very often. So when it does come up, we’ll go four times on the share size just because we know historically what the statistics on the pattern are.

So it’s not a template that we’re using, per se. It’s not something where we can say we’ve definitely got to narrow our target, so let’s double up. But if all of the pieces of the puzzle fall into place, then we’ll definitely go and take the opportunity.

Would you say that traders have maybe used HFT to find one more excuse to explain why they’re not having a good time in the market?

I think it’s kind of a cop out. I think that HFT is just a natural extension of some of the stuff that’s been going on for a long time.

I think the bigger issue is really volume dying off in conjunction with HFT trades going off. And, if you look at the flash crash, the thing really started when a mutual fund decided they were going to liquidate a bunch of minis. They set the ball in motion; it wasn’t the HFT guys. HFT might have perpetuated it, but it’s no different in our trading.

It’s not the fault of HFT guys. It’s our job to go and find the opportunities in light of the fact that there’s going to be high-frequency trading.

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