Jayanthi PicDecember 2013

Every day, institutional investors are moving millions of shares through the market, which the general public cannot see. To hide their transactions from the public, institutions break their transactions into smaller order sizes, called iceberg orders. Most of these transactions are performed by algorithms that take microseconds to place trades. That’s a lot faster than it takes us to click a mouse.

To see how quickly these algorithms work, all you need to do is look at what happened to the stock price of Netflix (NFLX) on October 24, 2013. The company announced better-than-expected earnings, and the price of the stock — which had already been on a tear — rose nearly 10% at the open. Carl Icahn, the billionaire investor, sold 2.4 million shares of Netflix that day just for the sake of taking profits (although he had also been selling leading up to the earnings release date). Prior to this fact becoming known, shares of NFLX plunged more than 9%. Let’s assume that Icahn’s sell order was split up into several small orders. Algorithms detected this and started selling off shares like crazy, which led to the huge selloff that went on until the close. This type of scenario is not uncommon in today’s market, given that most of it is controlled by algorithms. Is there a way for the retail trader to squeeze anything out of this market?

There is, but you have to know the market inside out. In our interview this month (starting here), Jea Yu tells us how it’s important to recognize a move when it happens. He has an interesting perspective on the market and has figured out that if you are on the same side as the bigger players, you could win. If you fight them, you have no chance. Understanding the markets is no easy task, as Yu reminds us; it took him years to figure it out. Even if you use a simple, easy-to-construct trading system such as the one described in “Swing Trading With Three Indicators” by Donald Pendergast starting here, you still need the discipline to follow it and understand that it will not work with everything you trade.

Today’s markets are more volatile than ever. You wouldn’t want to be caught off guard, especially before the holiday season. Instead, dwell in the joy, happiness, and health that can come to those who seek it. Seasons Greetings!

 Jayanthi Gopalakrishnan, Editor

Originally published in the December 2013 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2013, Technical Analysis, Inc.

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