Making Trading Human Again

If there is one thing true about the past decade in markets it’s that computers now dominate all trading. Its truly been the decade of Virtu and Citadel and the glory days of the individual prop trader are as quaint as the pictures of fat sweaty guys battling it out in Chicago pits.

Execution has become so efficient that brokers all now offer free trades and still make tons of money from kickbacks in the spread. There is no argument that you can no longer compete with a robot on a sub-second level. The machines will always beat you.

Yet anyone who has ever run an algo on any longer time frame knows just how stupid computers can be. Like idiot-savants, they are excellent at producing one single task well, but can’t adjust to even the slightest change of environment. Last month was yet another example of algo apocalypse amongst some of the most famous names in the business as the growth/value books completely broke down creating massive losses that some of the most sophisticated trading models never anticipated.

As I’ve said many times before our greatest asset as humans is our ability to lie. Without lying poker would be a dry boring game between machines and financial markets would have all the excitement of a cell phone bill. It is precisely the messy, inefficient friction introduced by lies and random human activity that keeps markets from devolving into perfectly efficient engines of boredom.

Aside from lying, humans excel at one other activity that binary systems like computers simply cannot master well — pattern recognition. 200,000 years on the Savanah plain and several billion neurons later have taught us to take note of even the slightest change in the environment.

Kids do this naturally. Move your 5-year-old favorite toy just a few inches off-angle on a shelf and they will notice it right away. I am always astounded at how my older kids when they were younger and my little one now would instantly sense even the most minute changes in our apartment building such as a blinkering lightbulb in the ceiling of the lobby.

Lately, K and I have started to exploit our human skill at pattern recognition by creating visual indicators for TradingView charts that help us make trading decisions in seconds. This has been revolutionary for our business. In the last 10 weeks alone K made more than 1000 pips in swing trades by using her Zip Trader heatmap indicator to help her pick the right trades. I managed to bang out 90% winners in my Flow trades by looking at the visual charts I created for that setup.

The irony is that we haven’t really changed much of the logic of the original strategies. The math behind the set up remains pretty much the same, but the ability to contextualize it visually has not only helped us see the trades faster but also choose them much better.

I am very excited about this project and feel that for the first time in ages we have a true edge on the machines. Next week we will be doing a free webinar about this project of ours so stay tuned. I think you’ll find it very interesting.