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What is High Frequency Trading and How Can You Be Successful At It?

More and more, I hear new and experienced retail traders talking about High Frequency Trading (HFT). Most people think this type of trading is done by computers, managed by Ivy league physics and math wizards. The truth is, HFT can mean different things to different people. During this piece, we will spend some time understanding conventional HFT and more time on helping you attain the skill to do this for yourself from the comforts of your home.

Conventional HFT is the use of computer algorithms to rapidly trade securities for the most part, and futures to a lesser degree. HFT strategies use computers to execute moves in and out of positions in seconds or fractions of a second.  Conventional HFT relies heavily on advanced computer systems as speed of execution and access to best prices are key. Conventional HFT is almost exclusively used for market-making and arbitrage trading. Now, keep in mind that just because a big firm has a HFT division doesn’t mean they are making money at it. Some do of course but big firms still compete with each other for pennies and speed and strategy can mean the difference between success and failure for the firm. Just like the world of Hedge Funds, many fail very quickly.

Ok, enough about HFT firms and institutions, how can you become a successful HFT? First, I want to be clear that my definition for HFT in this article is not thousands of trades in a day, its 5 – 15 in an hour or so during the early morning trading session in the USA. Below is a recent volume based chart of the S&P E-Mini Futures. In general, the way I do it and we teach it is to apply our core supply/demand strategy to very small time frame, volume, or tick based charts. The yellow shaded boxes are supply or demand levels. The circled areas represent the entry points. Typical trade duration is seconds, not minutes.

high frequency trading chart example

The chart on the right is one of those opportunities enlarged on the chart that I traded, last week. We are simply applying our core supply/demand strategy to very small time frames. However, there are some details that make this work.

1)      Make sure the levels is “fresh.” First pullbacks to fresh levels only is key.

2)       The strategy works best 30 minutes prior to the NY open to about an hour after the open. There is nothing magical about this time or anytime. However, this is when liquidity is very strong which is key.

3)      Make sure there is enough of a Profit Zone to make the trade high probability.

4)      Use Volume, Tick, or a very small time frame such as a 1 minute chart (which is often too big).

Keep in mind that when it comes to trading, whether you are Goldman Sachs, Bank of America, a HFT firm, a self – directed trader at home, or a brand new trader sitting in one of our Pro Trader classes around the world, how everyone makes money trading is no different. It’s all about buying low and selling high and vice versa. There is no magic secret sauce to this. Identifying where prices are going to turn and where they are going to go in advance is every ones quest. The focus needs to be on developing this edge. Once you have it, the rules for everything from short term trading to longer term investing are not that difficult.

Hope this was helpful, have a great day.

Sam Seiden


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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