11 Trading Tips for Beating the Machines

Think it’s impossible to beat algorithmic traders at their game? Think again. The prop-desk whizzes at Goldman Sachs, Morgan Stanley, Citicorp et al. are barely making money these days. Even the Houston Astros are having a better year. The reason is simple: With so many rocket scientists in the game, the purely mathematical edge in trading has been chopped, sliced and diced down to nearly nothing.

This spells opportunity for traders who think like traders rather than like mathematicians. Understanding the psychology of trading is something the machines have yet to master. This means you can beat them by out-thinking them. And it’s not as difficult as you might think.

Here are some tips that can make you money when you go up against the algos. They all follow from the simple but crucial idea that winning trades never come from the psychological comfort zone. With that in mind, consider the following:

1. If it seems too easy or tempting to get long or short, do the opposite.
2. Distrust weak rallies or declines that follow the “running of stops”.
3. Don’t simply bail out of a terrible trade; reverse the position quickly and go with the flow.
4. Look for the bull or bear trap in every enticing trade set-up.
5. Wild price swings driven by news or events tend to produce, paradoxically, precisely predictable highs and lows. Find a technical system that can identify them, and stick with it.
6. Shun breakouts unless they are so subtle that the computer whizzes will likely have missed them.
7. The trend is not your friend, as the saying goes; it is your enemy, since the more mature a trend, the more devious and evasive it tends to become.
8. Nothing enhances a trader’s horse sense and timing like taking a small partial profit early in a trade.
9. Never settle for less than $3 in gains for each $1 you’ve put at risk.
10. Don’t initiate a trade without a clear escape route and a plan for taking profits.
11. The easiest trade of the day will often be in the opening minutes, when everyone is waiting for the dust to settle.