17 September 2014 ~ The best trades are “gimmicky” by nature, rather than “organic”

Over the last several years I’ve read thousands upon thousands of trading forum posts, and they have cumulatively left me with at least one lasting impression:

A vast majority of traders believe the key to consistent profit lies in learning to read the ebb and flow of the markets (to develop a “feel for it”), the same way you might go about learning to understand a foreign language.

Jim Dalton’s Market Profile is a great example of this mentality. He recommends breaking the market down in to 30 minute chunks and charting where price ranges during each segment of time. As the hours pass, the chart begins to take shape and, in theory, you make some judgements about where price is heading next from the way the chart (“market profile”) develops.
It’s an organic process which you are supposed to get better at over time – it’s not something somebody teaches you to do in a single day.

While I appreciate Jim Dalton/Peter Steidlmayer isn’t trying to give a mechanical breakdown of when to click buy and sell – the fact is I have observed that the real success comes instead from “gimmicky” trades, as I call them.

What are gimmicky trades exactly? Here are five examples that spring to mind:

1) The bund flipper. I personally have traded this one, although in recent years it has rarely been seen. If you haven’t heard of the flipper before, he operates roughly like this:
He might post a very large bid in the order book, in plain view of the other participants. His real intention is actually not to buy – he is trying to spook others (and/or opposing algorithms) in to buying instead.

In actual fact, often he may simultaneously be offering to sell. He is prodding others to buy from him, and the next thing you know he withdraws the huge bid and posts a huge offer instead! I’ve seen this play out numerous, usually lasting a few minutes each time.

It can be an emotional roller-coaster for the other participants as they get chopped from both sides… so it’s important to be able to recognize it and try to hang on to the flipper’s coat tails when you realize what’s going on.
Incidentally, it shouldn’t be difficult to detect, as the phoney bids will be so big they will stick out like a sore thumb. Of course, the flipper is taking a risk because somebody out there with deep pockets might come along and hit his bid – but that’s the game he plays.

I spent time at a proprietary trading firm where the bund flipper was responsible for launching one or two trading careers (i.e. relative newcomers extracted hundreds of thousands from soley this strategy).
If you’d like to know more about the flipper, read this infamous article.
Disclaimer: The flipper was big several years ago, but hasn’t really shown his hand in any meaningful way in recent years. I’ve also seen him on CL and FDAX…

2) Hitting economic numbers with superior technology. Don’t try this at home, but trust me, if you have an outstandingly quick connection to the exchange (prop trading firm standard), and if the economic data is wildly off expectation, there’s a good chance you can make money if you hit market immediately. Naturally, unless the market is given a genuine shock (e.g. NFP +200k instead of +100k would be quite shocking, +105k wouldn’t be), lightning fast algorithms will have all the profits to themselves, leaving you to hold the bag.

3) Tim Sykes Gap-Up strategy. Infamous penny stock trader Tim Sykes made a small fortune in his early 20’s on the back of… well, let’s face it, taking advantage of the dirty work done by boiler rooms. See his book, American Hedge Fund:
“Brokers frequently called their targets around dinnertime to have the greatest chances of finding somebody at home to take their phone call… Hence, the pileup of pre-market orders and nearly the entire reason for the gap-up plays that had made so much money for me”.
For those who haven’t and won’t read the book, the gist of the strategy was to buy bullish-looking stock towards market close, hold it until the next day by which time the price will have gapped up over night… $$$!

4) Trading Market Close. During the last 15/30 minutes of the cash sessions (so for bund 4:15pm UK time, for S&P500 10pm, for Ftse 100 4:30pm), a tremendous increase in trading volume is all but certain. Much of this increased activity will be due to “Market on close” orders, plenty of it could be profit taking, plenty of it could be what is known as “window dressing” – whereby big hitters in the market try to push the price above a certain level for any number of private reasons. These effects can be especially pronounced during the last trading day of the month, so look out.

Similarly, the first trading session of the month/quarter/year may see inflows of new Fund money being pumped into the market. This is quite well known. Notice how the first trading session of the new year typically sees sharp gains.

new_year_SP500

This is all quite “cheap and gimmicky” isn’t it?

5) Hitting economic news. Ahh, my favourite, and the underlying focus of this blog. Economic news can come at any time, in any form. I do classify central banker statements as such, although they are pre-scheduled and therefore not quite to my liking. Anyway, in my humble opinion this is the highest probability method of making money: sit at your screen day in day out, and wait for WW3 to breakout. Then sell. If you’re going to be 5 seconds late, hmmmm, maybe you’d best sit on the sidelines! As far as glamour goes, this scores a 0 out of 10. Believe me, I’ve sat in silence staring at real time news for unnatural stretches of time – all the while thinking “what if?…”. That keeps you motivated.

The two key points that these trades have in common is;
* They are not glamorous in any way, and require very little “skill”.
* They can be explained to anybody, being fairly mechanical in nature, which leaves no scope to write books / sell training courses about them!

I hope I’ve convinced a few of you that learning to read the market like it’s a book ain’t necessarily the way forward!

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