Algorithmic Price Action Trading Strategies by Benzinga
Algorithmic Price Action Trading Strategies
By Robert F. Smith
Algorithms, a traders best friend.
Wait what?? One of the most common misconceptions in trading is that “the algorithms choose me”. Nothing could be further from the truth. Maybe this has happened to you. You place a stop loss order below an obvious pivot, only to be stopped out and see the price reverse the other way. You are a victim of price discovery, not algorithms. Think about it for a second, a program doing that wouldn’t make any money. Selling a stock down and then reversing and starting to buy makes no sense.
Let’s be clear about what algorithms are. There are two types of algorithms or what we call “automated trading”. The first type definitely rips you off, but you won’t even notice it. This is called high frequency trading. These programs are designed to execute your upstream commands, but for milli-cents and milliseconds and like I said, you won’t even notice it.
The second type is simply algorithmic trading where a program executes orders instead of a human. This second type is your best friend. You may have heard struggling traders say, “Just do the opposite of my trades and you’ll make money.” It’s not true. The opposite of losing trades is not winning trades, it is not trading at all. Otherwise, we could just build losing programs and then tell the program to do the opposite. I have news for you, he would lose again. So how can we use algorithms in our favor, you ask?
Very simple. For any trading program, there are 4 things that need to be programmed. What vehicle, SPY (NYSE:), AAPL, etc. What do you want him to do, buy or sell. How do you want him to do it, by staying on the offer or by accepting the offer, sell by staying on the offer or by reaching the offer. When do you want him to do it and for how long. If we then use multiple period analysis, we know EXACTLY what they told them.
For macro purposes, I start with annual and quarterly charts. However, we mainly use these four openings as price references. Monthly, weekly, daily and 60 minutes. By using multiple timeframes, we can identify different groups of participation by price and time, so multiple algorithms knowing that 70% or more of executed trades are automated.
In order to separate the groups, we need a sequence of time to pass. We prefer to have 4 separate opening hours for each to identify specific groups. It doesn’t mean we don’t trade until we have them, it means we get more information when we do. Here’s what I mean by that. Every Monday, the opening day, week and 60 minutes are the same for the first hour. After the first hour, the 60 minute has a new opening price, while the day and week remain the same all day.
On Tuesdays, the daily separates from the weekly by having a separate opening. Tuesday’s second hour, we’re calling it “The Uncoupling,” where we finally have four separate openings for monthly, weekly, daily, and 60-minute bands. However, if a new month starts on a weekend, it doesn’t happen until the second hour of the second Tuesday because weekly and monthly stay the same all week.
So how does this help us understand algorithmic programs? Very simple if we come back to what they need to program. Take SPY as an example. If the price is trading higher than the 4 separate openings, here is what the programs have been asked to do. Trade SPY, BUY by accepting the offer, do it NOW. There is no other explanation, it MUST happen. Understanding this information helps us get to the right place at the right time, because we have to.
2020 being a tough business year for some, all you have to do is line up what I just told you and you’ll see how it’s not only saved you a lot of trouble, but put you in the most names strong as well. In February, SPY opened at $323.25. So anytime in that month below that number when the week, day, and 60 minutes were red, those bots hit the auction.
In March, SPY opened at $298.21. Same deal. The other issues were macro apertures. Below $323.58, SPY was red on the quarter and year. This all kicked into motion above the 200 day moving average, mind you. Then, just as I explained on the decoupling in 4 major periods, in April, you have a new quarterly opening.
SPY opened the new quarter and April at $247.98. That was well below the 200-day moving average and yet the start of one of the biggest quarterly point gains in decades, if ever.
Knowing this information would also have saved you the trouble if you hadn’t also gotten short stuff like airlines, cruise lines and tried to scoop a million dollars in Boeing (NYSE:).
Since we know that programs buy aggressively by accepting the offer when all periods are above their respective opening prices, this also allows us to track down very aggressive programs. Once the second term started, all you had to do was look for anything that was left or went green within a year of opening. For example, SHOP opened in April at $400. It opened for the year at $402.58. So anytime in April when the Monthly, Weekly, Daily and 60 Minutes were green above 402.58, everything was signaling more upside.
SHOP is at $1029.97 as I write this. So when all time slots are green except for 60 minute, we spin like hawks waiting for the 60 minute candle to see if the programs come back on. You’ll see them turn on and off, now that you know what to look for.
To make things even easier, all you had to do was think of the names that were actually created during the March Crisis. Specifically, ZM and TDOC. ZM was already howling higher in the first quarter after opening the year and quarter at $68.80. Then, after opening at $144.80 in April to start the second quarter, anytime above where monthly, weekly, daily and 60-minute buying was green, very aggressive algorithmic buying.
ZM is at $261.74 as I write this.
TDOC opened the year at $84. At the end of the first quarter, it closed at 155.01.
These are just a few, but if you look at all the big movers on the rise this year, you’ll see how they lined up in the same way. MELI, QDEL, COUP, NFLX, AMZN, SPOT, DOCU to name a few.
Let’s take another look at one of the most controversial names, Tesla (:TSLA)! In March, TSLA took a beating with the market. However, TSLA, you will recall, had a monster January to start the year. Thus, TSLA opened the year at $424.50.
After hitting $900 in February, it fell back to close March at $524.
Then when the new quarter and new month started in April, it opened at $504. Still well above its yearly open and for the second quarter anytime it was above $504 and the monthly, weekly, daily and 60 were green.
DO YOU SEE the robots! So now that you KNOW, think about what they do, automated algorithms become your best friends because they do all the heavy lifting for you!
Rob has been in business for over 30 years. He was a member of the Chicago Stock Exchange for 16 years, where he was an OTC and listed specialist, independent trader and research analyst for several companies. For 8 years he has been teaching his methodology and you can follow him on YouTube or Twitter (NYSE:)
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