When it comes to trying to beat the markets, I suggest leaving this to the mathematicians with a major in quantitative science.
Computers are capable of processing data faster than any person. Furthermore, when the bad and/or good news hit the Internet, the computers will be the first to buy and/or sell on the news. Therefore, by the time you place your order for the security based on the news, you will either overpay or undersell.
History tells us that specific events in the world may cause the price of various securities to go up or down. Furthermore, specific keywords or phrases can trigger a sudden wave of buying or selling when fed into a computer with specific instructions.
Therefore, ignore the stock ticker price. Understand how the stock market works. Stick with your conviction on your strategy. Your strategy will change since the stock market changes all the time. Your current strategy may need slight modifications or a complete overhaul. By playing the stock markets, you understand that there are no perfect money-making strategy.
Hedge Fund that consistently beat the markets
Oct 11, 2015
Revisiting an old post, I will like to add another reason why high frequency trading can be problematic for the markets.
When it comes to Canada, it is not illegal to do “wash trades”. http://business.financialpost.com/news/fp-street/why-did-rbc-abruptly-change-its-strategy-and-settle-cftcs-wash-trading-suit. Therefore, when it comes to technical analysts who rely on volume, the number of shares that has changed hands over a period of time, selling the security from Bob’s left hand and buying the security to Bob’s right hand is not exactly a trade. Yet, when it comes to trading volume, this is a trade. Therefore, a company can show a very high number of trades, but the demand can be artificially created by someone or something creating the illusion of demand. Furthermore, with a stock broker who is working with the wash trader, the fees charged can be minimal.
On the surface, it seems that this is a losing proposition, but when one takes the profit/loss in perspective, the trades done does not make any or lose any money in the process. For example, stock ABC last traded hands for $10 for 100 shares. An order is made to buy 1000 stocks of ABC for $20. Another order is made at the exact same time to sell 1000 stocks of ABC for $20. Since the price matches, the order will go through and the latest price that the stock traded hands will now be $20. Unfortunately, since nobody knew that ABC was sold and bought by the same entity or different entities working together, the people will assume that there the demand is growing for stock ABC and the price is rising.
As fascinating as it may seem, computers are becoming the tool of choice for many. For example, in order to buy premium domain names that have expired, one can create a program that will try to purchase the domain name at the exact moment that it expires. For example, a domain name with an intrinsic value of $1000 can be sniped for $10 a year.
A computer program can be created that will look over a company’s financial statements and determine how many shares if any the computer program will buy.
As many will know, the stock price is driven by profits but also by speculation. Therefore, when purchasing stocks one needs to look beyond the books and into the computer programs that are programmed to buy and sell stocks at any time. In order to master the market, one will have to have a firm understanding of what the computer programs deem stocks that are sell or buy.
Therefore, when people say the stock price is driven by speculation, they are partially right. The stock price is also driven by computer programs that are designed to automatically buy and sell stocks based on the criteria programmed into the computer program. These computer programs most likely have some sort of artificial intelligence. After all, many companies are leaving these computer programs running on autopilot.
High frequency trading can be read about in the Wikipedia at http://en.wikipedia.org/wiki/Algorithmic_trading
Why high frequency trading forces people to purchase at higher prices can be seen at http://market-ticker.denninger.net/archives/1259-High-Frequency-Trading-Is-A-Scam.html. Based on the fact that flash trading, http://www.investopedia.com/terms/f/flash-trading.asp, is allowed in some stock exchanges, computer programs can be programmed to take advantage of a sellers market.