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The human brain vs. an algorithm. Who wins?


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The human brain vs. an algorithm. Who wins?

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  #1 (permalink)
 mzelixon 
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I have a relatively simple strategy, I'm all about chart patterns and price action, mainly support/resistance and supply/demand levels.

No indicators or anything besides the occasional glance at volume profile.

That's how I trade.

My question is... will the Big Money Algos interfere with my trading?

Are they trying to take my small 1-2 lot positions out of my pockets?

Or are the hedge funds and banks worrying about bigger fish to fry?
(Such as OTHER banks and hedge funds)

What do you think ?

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 mzelixon 
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Small example of what I mean

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 wldman 
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Complex questions there.

I will say, as a former market maker...screen and floor...that nobody gives a shit about how or where your orders are. I hear and see a great deal of angst about "running stops" and such. What happens is participants will take advantage of where liquidity is...it has nothing to do with the level or who is there. The professional community hunts and exploits liquidity.

What happens is "dumb money" retail participants rest limit orders. If they are server side they are discovered by algos...if they are displayed, they are visible in the book. Also as noted there are "mental stops" that can be anticipated around specific price points. Those prices are determined by prior volume or by indicator "levels" where a propensity of eyes are focused...like a fib level or universal MA level.

A beneficial shift in typical thinking is: Where is the smart money? As retail traders we will do infinitly better if we are "with" smart money. Predator, rather than prey.

In the graphic you posted: Are those resting orders in the book? The entire world can see that. Think of playing poker at a table where some of the players down cards are face up visable to everyone. When the table knows your cards the only way you can beat them is by the luck of the draw. It's still a game of chance but one side is relying on luck while the other side has a verifiable "edge" in knowing what other players hold.

I hope that helps.

Dan

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 wldman 
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That dashed line is VWAP, perhaps the most watched squiggly line currently. You can see a confluence or a reversal at the VWAP or at the std dev lines. In fact 6 for 6 since the open. This is effectively showing where there is a difference of opinion OR where new orders have come in.

R2 is also @ 39.25


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 mzelixon 
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wldman View Post
Complex questions there.

I will say, as a former market maker...screen and floor...that nobody gives a shit about how or where your orders are. I hear and see a great deal of angst about "running stops" and such. What happens is participants will take advantage of where liquidity is...it has nothing to do with the level or who is there. The professional community hunts and exploits liquidity.

What happens is "dumb money" retail participants rest limit orders. If they are server side they are discovered by algos...if they are displayed, they are visible in the book. Also as noted there are "mental stops" that can be anticipated around specific price points. Those prices are determined by prior volume or by indicator "levels" where a propensity of eyes are focused...like a fib level or universal MA level.

A beneficial shift in typical thinking is: Where is the smart money? As retail traders we will do infinitly better if we are "with" smart money. Predator, rather than prey.

In the graphic you posted: Are those resting orders in the book? The entire world can see that. Think of playing poker at a table where some of the players down cards are face up visable to everyone. When the table knows your cards the only way you can beat them is by the luck of the draw. It's still a game of chance but one side is relying on luck while the other side has a verifiable "edge" in knowing what other players hold.

I hope that helps.

Dan

I absolutely love poker analogies to trading (they kinda go like peanut butter and jelly don't they? )

The orders you see there were for a short position, buy LIMIT on the lower side, and a buy STOP on the upper side... do the algos / pros see both of these ??

But yeah... I get your drift either way.
Be the hunter not the hunted.

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 wldman 
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Those orders are seen by anyone that looks.

I do not know with any detail how granular "huntable" data is these days.

Through the late 90's as a NASDAQ market maker I could see fairly deep into counter-party data. The top of funnel was do the actual trades match that desks position in the NBBO and what they may or may not be saying on the telephone. When the ECN's were created participants gained a way to maintain anonymity. You could display on one side of the inside market and be active on the other side at the same time.

So on granularity...rather than starting another entirely new story. I don't know how retail firms route orders or what the contra party can see right away. The metrics that were common 20 plus years ago were manual and complete dinosaurs compared to today's world where server co-location give a speed edge that people build a business model on.

Here is my Jurassic era rule that still applies.: Don't give up information unless doing so helps my position or plan. I know guys will disagree and they may be correct, but for me, resting limits are lazy and an unnecessary give up of information. I cant be concerned with who might be looking or how because I can not compete on that field...so I don't show unless there is a separate purpose.

Rest assured though that super smart Physics guys that are total whips at programming and genius computational finance guys will find a way to take a penny from you until doing so is limited by rule or eliminated by a faster better penny swiper.

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 TheShrike 
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mzelixon View Post
I have a relatively simple strategy, I'm all about chart patterns and price action, mainly support/resistance and supply/demand levels.

No indicators or anything besides the occasional glance at volume profile.

That's how I trade.

My question is... will the Big Money Algos interfere with my trading?

Are they trying to take my small 1-2 lot positions out of my pockets?

Or are the hedge funds and banks worrying about bigger fish to fry?
(Such as OTHER banks and hedge funds)

What do you think ?

Think about what you are asking. Retail traders make up such a minuscule portion of the average daily volume traded. Do you think an investment bank is taking the time to hunt down your one lot? It doesn't make any sense. Trading is hard enough without putting these boogie men in your head. No one is out to get you, no one cares what you're doing. Carry on.

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 tturner86 
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Yes, they will take every dollar from you. But not because they care about you it is just what the market designed to do. Transfer your funds in to their account. Think about it, the lion isn't concerned about the sheep, it just eats them as it finds them.

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 Rrrracer 
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Everything you see on the charts is institutional money. As @wldman mentioned, price seeks liquidity, which is found above highs and below lows... and where most retail traders have "learned" to place their stops. Convenient, no?

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 RDK91 
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wldman View Post
Those orders are seen by anyone that looks.

I do not know with any detail how granular "huntable" data is these days.

Through the late 90's as a NASDAQ market maker I could see fairly deep into counter-party data. The top of funnel was do the actual trades match that desks position in the NBBO and what they may or may not be saying on the telephone. When the ECN's were created participants gained a way to maintain anonymity. You could display on one side of the inside market and be active on the other side at the same time.

So on granularity...rather than starting another entirely new story. I don't know how retail firms route orders or what the contra party can see right away. The metrics that were common 20 plus years ago were manual and complete dinosaurs compared to today's world where server co-location give a speed edge that people build a business model on.

Here is my Jurassic era rule that still applies.: Don't give up information unless doing so helps my position or plan. I know guys will disagree and they may be correct, but for me, resting limits are lazy and an unnecessary give up of information. I cant be concerned with who might be looking or how because I can not compete on that field...so I don't show unless there is a separate purpose.

Rest assured though that super smart Physics guys that are total whips at programming and genius computational finance guys will find a way to take a penny from you until doing so is limited by rule or eliminated by a faster better penny swiper.

Interesting, i knew limit orders where in the books to be seen by everyone. I did not knew stop orders where visible as well.

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 wldman 
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KNOW for sure, because I do not pay attention to what firms do with their orders...routing or otherwise. A server side order could rest on the firms server waiting till a time when it becomes a marketable limit order or a market order.

Though I don't typically use them, on my current platform and at least three others I have experience with, I can see my orders both stop and limit. I'm assuming that if I can see them posting to and resting in the montage that others who wanted to see them could see at least that much.

I'm not a tech guy and it does not pay to, so I do not know for certain that those orders rest server side at the broker, with the exchange or locally here on my machine. I am certain that we have all at least e-signed a notification that we are aware of the order handling rules and how each of our brokerage firms route. I'm guessing that the default is some type of "smart" routing.

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 paps 
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TheShrike View Post
Think about what you are asking. Retail traders make up such a minuscule portion of the average daily volume traded. Do you think an investment bank is taking the time to hunt down your one lot? It doesn't make any sense. Trading is hard enough without putting these boogie men in your head. No one is out to get you, no one cares what you're doing. Carry on.

this is correct. they r not after 1/2 lots....its a different thing that stops maybe triggered if all located at similar location as bigger orders or there is a stop run.

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 RDK91 
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wldman View Post
KNOW for sure, because I do not pay attention to what firms do with their orders...routing or otherwise. A server side order could rest on the firms server waiting till a time when it becomes a marketable limit order or a market order.

Though I don't typically use them, on my current platform and at least three others I have experience with, I can see my orders both stop and limit. I'm assuming that if I can see them posting to and resting in the montage that others who wanted to see them could see at least that much.

I'm not a tech guy and it does not pay to, so I do not know for certain that those orders rest server side at the broker, with the exchange or locally here on my machine. I am certain that we have all at least e-signed a notification that we are aware of the order handling rules and how each of our brokerage firms route. I'm guessing that the default is some type of "smart" routing.

Thanks, i am going to try to find out some more.
Can be interesting to know.

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 iantg 
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The only thing the Human Brain has that an algorithm doesn't have is hubris. An algorythm can do anything a human can do, but it just won't have an ego.


Ian

In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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 Kiks 
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I place 4 limit orders at 1 tick apart. With different lot sizes.
It works for me.
They are placed one after the other in less than 1 millisecond total.
If they stray too far from current price, my software just removes them.

This is not quote stuffing. Quote stuffing is frowned upon if you remove your orders as the BEST BID & OFFER moves closer. It is the other way around for my limit orders. My orders love to get hit.

No one knows if they are my entry or exit.
If they get fulfilled, it is better for me.
My average price will be much lower.

Let the whole world see those orders on the DOM.

I hope more brokers offer metatrader 5 (not just AMP Futures) so I could run my robots on different accounts.






wldman View Post
Complex questions there.

I will say, as a former market maker...screen and floor...that nobody gives a shit about how or where your orders are. I hear and see a great deal of angst about "running stops" and such. What happens is participants will take advantage of where liquidity is...it has nothing to do with the level or who is there. The professional community hunts and exploits liquidity.

What happens is "dumb money" retail participants rest limit orders. If they are server side they are discovered by algos...if they are displayed, they are visible in the book. Also as noted there are "mental stops" that can be anticipated around specific price points. Those prices are determined by prior volume or by indicator "levels" where a propensity of eyes are focused...like a fib level or universal MA level.

A beneficial shift in typical thinking is: Where is the smart money? As retail traders we will do infinitly better if we are "with" smart money. Predator, rather than prey.

In the graphic you posted: Are those resting orders in the book? The entire world can see that. Think of playing poker at a table where some of the players down cards are face up visable to everyone. When the table knows your cards the only way you can beat them is by the luck of the draw. It's still a game of chance but one side is relying on luck while the other side has a verifiable "edge" in knowing what other players hold.

I hope that helps.

Dan


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 Kiks 
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Here is an interesting podcast about some trading myths. Take it with a grain of salt.

Trading Myths -- Bob Iaccino ? FuturesRadioShow

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 Fugitive69 
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On one hand an algorithm can't watch and learn a market over a long period of time in order to get a "feel" for it's moods and idiosyncrasies. On the other hand the algorithm doesn't have feelings like fear and greed to get in the way.

If I had to choose, I'd vote for the algorithm.

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 sands 
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As the human brain usually writes the algo. I'm going with human brain winning. Adapting to context is critical and whilst machines can do this people have the edge at this point.


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 iantg 
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Hi Kiks,

What you are describing is legit. There is nothing wrong with strategically canceling orders, or submitting multiple orders to gain optimal position in the queue. I think quote stuffing honestly comes into play more in the cases of equities where 2 or more exchanges have the same stock. Predatory HFT players send tens of thousands of messages over just to try to slow the server down so they can arb against it.

With a single exchange such as the CME, there is no real equivalent arb... Maybe spy etf, but that is a stretch to thing anyone could pull that off. Anyway, the only real thing to watch out for is your messaging limit. You get something like 20,000 per day for free before they check you... Then they measure your fill rate against your messages. You may already know this but here is a tip I learned. A cancel counts as 3 points but a price mod counts as 1. A bit more of a PITA to do price mods on the spot vs. cancels, but if you can figure out some logic for this it will save you a ton towards your messaging limit.

It sounds like you and I may be playing in the same space a little.

Best of luck!

Ian



Kiks View Post
I place 4 limit orders at 1 tick apart. With different lot sizes.
It works for me.
They are placed one after the other in less than 1 millisecond total.
If they stray too far from current price, my software just removes them.

This is not quote stuffing. Quote stuffing is frowned upon if you remove your orders as the BEST BID & OFFER moves closer. It is the other way around for my limit orders. My orders love to get hit.

No one knows if they are my entry or exit.
If they get fulfilled, it is better for me.
My average price will be much lower.

Let the whole world see those orders on the DOM.

I hope more brokers offer metatrader 5 (not just AMP Futures) so I could run my robots on different accounts.


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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 Kiks 
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Thanks Ian.

I am far from reaching that messaging limit.
Is that messaging limit of 20000 per symbol/day or per trading account?

I'm trading only ES. Planning to add CL in six months.





iantg View Post
Hi Kiks,

What you are describing is legit. There is nothing wrong with strategically canceling orders, or submitting multiple orders to gain optimal position in the queue. I think quote stuffing honestly comes into play more in the cases of equities where 2 or more exchanges have the same stock. Predatory HFT players send tens of thousands of messages over just to try to slow the server down so they can arb against it.

With a single exchange such as the CME, there is no real equivalent arb... Maybe spy etf, but that is a stretch to thing anyone could pull that off. Anyway, the only real thing to watch out for is your messaging limit. You get something like 20,000 per day for free before they check you... Then they measure your fill rate against your messages. You may already know this but here is a tip I learned. A cancel counts as 3 points but a price mod counts as 1. A bit more of a PITA to do price mods on the spot vs. cancels, but if you can figure out some logic for this it will save you a ton towards your messaging limit.

It sounds like you and I may be playing in the same space a little.

Best of luck!

Ian


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 iantg 
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I believe it is per account per day. Here is the info in case you ever reach that scale....

https://www.cmegroup.com/globex/files/revisedmep.pdf?redirect=/globex/files/CMEMessagingProgram.pdf

Ian


Kiks View Post
Thanks Ian.

I am far from reaching that messaging limit.
Is that messaging limit of 20000 per symbol/day or per trading account?

I'm trading only ES. Planning to add CL in six months.


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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 Kiks 
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iantg View Post
I believe it is per account per day. Here is the info in case you ever reach that scale....

https://www.cmegroup.com/globex/files/revisedmep.pdf?redirect=/globex/files/CMEMessagingProgram.pdf

Ian

They have several examples in Appendix B.
If ever I trade another instrument, I'll open a sub-account.
One account per instrument traded.

Thank you Ian.

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 wldman 
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So, laying them out there fits your strategy. That is a good reason to do it...and thus the "dumb money" comment does not apply.


Kiks View Post
I place 4 limit orders at 1 tick apart. With different lot sizes.
It works for me.
They are placed one after the other in less than 1 millisecond total.
If they stray too far from current price, my software just removes them.

This is not quote stuffing. Quote stuffing is frowned upon if you remove your orders as the BEST BID & OFFER moves closer. It is the other way around for my limit orders. My orders love to get hit.

No one knows if they are my entry or exit.
If they get fulfilled, it is better for me.
My average price will be much lower.

Let the whole world see those orders on the DOM.

I hope more brokers offer metatrader 5 (not just AMP Futures) so I could run my robots on different accounts.


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