February 2009 Archives

When the S&P 500 e-mini where beginning to get some traction we used to S&P 500 pit Squawk Box all day long.

You wouldn't need to look at the screen all day long...you could go about your work, ours being software, and the Squawk would let you know when to focus on the market.

For me, my ears would pique when the frequency of the barks increased and the action switched from bid to ask, and vice versa.

You could also hear the muscles in the announcer's neck tighten and his pitch rise a bit.

Hearing that audio pattern was what moved my focus from the monitors where I was working on software to monitors that were plotting the e-mini.

Though we have yet to throw audio into the Nano-Trading mix, I am sure that  patterns are in there that can be manifested aurally, and that any trader who had the inclination could keep the market on in the background and within a couple of day's start to hear patterns.

If we do this test here, the first pass will be kept simple, and we will use pleasant sounding tones (I never understood why rings of telephones can't be substantially more pleasant and soothing).

Perhaps, with a filter on lot sizes, each time a market transacts at Bid then Ask then Bid then Ask then Ask a wind chime could play for ½ second and follow with a soft Pop for each consecutive upward Price tick.  

Simultaneously we would plot these movements on a chart and write the data out to a log file.

Within this entire approach there is no mention of a Technical Analysis indicator, such as MACD, or Stochastics.  They do not apply here as these Minor Price Events don't lend themselves to being averaged. 

But they do lend themselves to indicating where Price may be going in the next few milliseconds.

My gut tells me that if someone did this in an iterative fashion for a week or so they would find patterns that they could profit from.

I think that the patterns that will dominate and offer the most lucrative rewards will be when a series of Program Trades start to fire and chew up the available inventory in the book.

From our experience, Program Trades tend to fire off simultaneously.  Traders still herd, though today, most of it is done programmatically.

This is one of the benefits of focusing on Transaction Level Analysis as opposed to Technical Analysis.  It may take a little more programming work and fast infrastructure the payoff is in this information.

Currently, we do most of this pattern recognition discovery work programmatically, but I miss listening to 'my buddy' from the pit on the Squawk so maybe this little project will be ratcheted up the priority list.

Hope this helps.

May be we can explain what Nano-Trading is by explaining what it is not.

What Nano-Trading is Not:

·         Nano-Trading does not use Technical Analysis indicators (MACD, RSI, Stochastics, etc).

·         Nano-Trading is not about 'fast' or 'high frequency' trading yet it still needs a massive amount of processing power, custom software and low latency to succeed.

A little more on what Nano-Trading is:

·         Nano-Trading is more like Morse Code....Dot, Dot, Dash, Dash, Dot, Dash, Dash

o   Where the Dot's and the Dash's are discrete Price movements....kinda like:

§  Price Up, Price Up, Price Down, Price Down, Price Down, Price Up

·         Feel free to make up your own 'Morse Code' algos.

·         Nano-Trading offers setups that are consistent for a particular market across all market environments.

·         Increased volatility does not alter a Nano-Trading system, it only provides more setups.

Hope this helps clarify some things and sets you pondering the possibilities.