Trading With the Algorithms, What We See Without Emotions

Today the ES (S&P Futures) contract dropped over 50 points as of 1:45pm EST and has left many scratching their heads in awe. If you were watching the news this morning which preceded the large decline, you’d hear that many talking heads were impressed with the presidential speech to the United Nations. So how is it that the US financial markets have shown a momentum decline?

The simple answer is; it doesn’t matter! In our daily training room, we discussed our wants (new highs) and why we would NOT enter based on this information. Furthermore, we discussed our methodical approach which dictated the only option was to sell the market at that time.

Trading With Algos

Today was a prime example of how high frequency algorithms can affect the financial markets with sudden movement, especially when it is unexpected. Often news will encourage a bullish or bearish bias and institutional trading algorithms will do the opposite. While this is simply impossible to predict, there are ways to predetermine such movement with great consistency and accuracy.

Algos have exactly 0% subjectivity or emotions making them very effective. Pile on the fact that they’re used by some of the largest financial firms in the world, this is a recipe for momentum trading at its’ best. An investing goal should never be to predict this type of movement, rather to follow it.

Removing Emotions from Trading

By focusing on price action, we can utilize recurring patterns ahead of the large momentum moves for trading. Price action is one of the only pieces of technical analysis that cannot lie or deceive in any way. Essentially what you see is what you get. For example, if an instrument trades up or down by one tick, price will visually reflect this on the instrument’s chart. Another example, if an instrument incurs large momentum, every increment of price movement is reflected on the corresponding chart.

Consistently trading price action patterns will keep emotions in check and help to stay on the right side of the market’s momentum with high probability.

Types of Price Patterns

Every trader has their own specific price patterns they prefer to use. Here I’ll share several that we use in our daily analysis of any financial market.

1. Supply and Demand Levels
2. Trendlines
3. Fibonacci Retracements | Extensions
4. Continuation Patterns

Combining these patterns together allows us to predetermine momentum reversals, breakouts, pullbacks and other types of behavior. The image below is an example of something that seemed to be positive in the news, however price told us something different, and how sticking with our methodical technical analysis put us on the right side of momentum along with the institutional algorithms.

Take note of the red supply zone above just before the substantial decline, as price arrived it was met with many sell orders that far surpassed the amount of buy orders causing the large drop. This alone would not be enough to predetermine the upcoming direction, however when we add in our trendline and larger time supply demand levels we’re definitively left with a bearish bias which is also 0% subjective. The only thing left is to determine the entry which is, in this case, our supply level depicted by the red zone.