Bots and High frequency trading

You’ve done your analysis, you’ve drawn your trendlines, your indicators are screaming at you…. Buy buy buy! You place your limit order, since you want to profit from a fee rebate or you feel confident that your order will get filled. Your eyes are glued to your screen, the order book is flashing like crazy with orders being filled. The price is dropping steadily, your eyes widen as the price steadily drops to your buy order. Trickling down 1–2 dollars at a time, this is it, you feel the rush of adrenaline and suddenly the market stops 20cents short of your order and reverses. Its okay you say, we are not going to cry about 20 cents, so you remove your limit order and place a market order. You feel the dismay as your new market order gets filled and this time the market has climbed way past the 20 cents slippage and is now 10 dollars up from where you wanted to buy.

Or suppose the market has dropped and you’re on the ball, you are right where you need to be to get the perfect trade, you’ve patiently been waiting for this. Your long order fills and you watch it find support and reverse, YES! Nailed it! You have slam dunked the perfect entry. Okay so now you’re in, you’ve eyed the relevant support and resistance levels. You place your stop loss to manage your trade as you have been taught. One green candle after the next, you’re feeling better than superman on steroids as you watch your profits climb. You comfortably close your laptop and call it a day. You go home, go about your business and go to sleep. The morning comes and the first thing you do is open your laptop to check in on your position. You log in, see the price and you have a sigh of relief, price is solidly above your entry. You check your position and there’s nothing there…huh? Before you log a query to support, you open the charts, only to find that during the night, price reversed to slightly past your stop loss in a massive flash crash and reversed back up again. All your patience and hard work for nothing!

If any of this sounds or feels familiar or perhaps you feel like the exchange is manipulating the prices, you have probably been the victim of high frequency trading(HTF for short) or algorithmic trading(algo trading for short). What is HTF or algo trading? It is complex rules that execute at lightning speed thanks to computers. Many simply assign them the term: bots. These bots can trade thousands of trades within milliseconds and can assess the market at a fraction of a second. While many may feel this unfair, it is perfectly legal and amongst major investment firms, it is often a common practice. Many hire quantitative traders and analysts to specifically design, program and implement these kinds of bots. There are algos that do market making(proving liquidity), those that read the market and make trades accordingly, or others that counter trade, algos that scope out stop losses. If it can make money or cause someone else to lose money, it’s probably been done.

To decide whether algos or HTF is for you, it’s important to note the advantages and disadvantages. The main advantages of using algos or doing HTF is obviously the profit factor otherwise no one would do it. Other advantages include; Trades can be executed much faster than any human. It can be used to buy you time away from your screen as you can automate any strategy that you currently follow. It can save you money or make you money by implementing things such as trailing stop losses or buy orders which may not be offered on your exchange. And, with sufficient knowledge you can countertrade other algos or develop a bot that reads the markets and performs trades automatically.

So if bots are so good, why isn’t everyone using them? Access has been the leading problem until recently, it requires programming and trading knowledge, 2 very separate skill sets. Quantitative strategies have only been possible to those who do it themselves or the firms who employ those people to do it for them. Nowadays the availability has greatly improved and there are a number of sites that allow you to make use of bots. Most require a subscription though… you didn’t think they’d let you print money for free did you? Many sites vary in cost, complexity and offering. To remain impartial I won’t mention any names, but a simple search on google will yield sufficient results. Algos are simply rules compiled into a program and told to run. Sure there are very complicated and in depth ones that make use of machine learning and AI, but for now these are still in the minority. The majority still follow simple rules for execution, much like you have you your own checklist for your trades. Bots are programmed by humans, which makes them susceptible to human error and nothing is without error. Other risks include server downtime, API restrictions, hacks and errors in the code.

It may seem unfair and impossible to beat these algos, is it even possible? How do you make money as a retail investor in a day and age where computers seem to be taking over the world? Here are a few tips:

1. If you have the time, energy and passion, you could pursue the path yourself, however for many this isn’t the case, whether it be due to time, money, or skill.
2. Manage your risk accordingly, if you are eyeing a particular level as a support/resistance area, chances are there are already algos in place to stop hunt those levels if you were to place a stop loss there, one way to avoid this is to avoid trading with a fixed stop at all, I should state that this is not good practice and highly unrecommended.
3. Manage your risk by widening your stop loss, by trading with a very wide stop or lower leverage, your odds of being stopped out are greatly reduced.
4. Limit the size of your trades, most people want to get rich quick by trading, sad reality is 90% of traders lose 90% of their money within 90days. By trading small, you will not only be less relevant on the order books but you will also attach less emotion to your trades, and ultimately you will also lose less on the occasion that you do get stopped out or make a loss.
5. Whales scale… even if you are a small fish, it’s still possible to apply the practices of those with big accounts. By spreading your orders, the odds of getting fills on your orders are higher and the likelihood of being fully stopped out is greatly reduced.
6. Move to a different exchange, while this can seem tedious, if you are constantly suffering slippage, being stopped out/liquidated or you not getting fills, chances are good there are a number of bots reading your orders… or you’re simply a terrible trader and need to learn more or not trade at all.
7. Place market orders instead of limit orders, this may account for higher fees but you eliminate the possibility of being counter traded by 50% since the algo can’t read your order until it has been filled, which is instant.
8. Avoid low time frames, most bots are buying and selling at high frequency. Trying to beat that as a human is as fruitless as drinking quicksand because you are thirsty.
9. Practice makes perfect. Perfect your strategy by running backtests and paper trading in order to see if your strategy is even profitable, simply eyeing the charts may work for a while but without systemic metrics, you are bound to fall into the trap of emotional bias

1. This is my favorite and the majority of people won’t do it… Do Research! You don’t need to be a programmer to be able to counter trade bots, you just need to be smart enough not to hand them your money. Platforms such as tradingview offer free accounts with which you can get very far by simply spending some time and doing analysis.

All things considered, I do feel there is a place for screen traders alongside automated systems as each have their own pros and cons but when combined they can form a very profitable alliance within an Asset management firm or as a retail investor. In a day and age where we rely so heavily on computers for our day to day living, is it really that hard to believe that we are already living in the future. Since the inception of computers it was inevitable that we would get to this point, so why try to fight it? If you can’t beat them, join them.

Disclaimer: I am a bitcoin researcher and algorithmic trader, but possess no formal qualification in finance. Thus the examples stated above are based on research and is intended for educational purposes only and should not be viewed as advice.

References:

Dollar and Sense,https://dollarsandsense.sg/how-to-beat-high-frequency-trading/

Tradingview, https://www.tradingview.com/

Brave new coin liquid index for bitcoin,

edited by: Chris Pickering