High-Frequency Trading (HFT) is a legal way of front-running the market, outsmarting and beating many traders to the chase in milliseconds. It can feel like the market is rigged in such situations, with the practice stopping countless traders and investors from profiting. Yet there are no rules against HFT, despite there being research into its legality.
Competing against computers that are running complex algorithms and systems to execute HFT, battling against them can seem like a fruitless endeavour. There are a few ways that you can beat the system or at least find an alternative to counter it.
Make Long Term Investments
One of the easiest ways to go about beating HFT is to simply avoid the practice. Do this by purchasing and holding stock for the long-term. Position trading is one of the popular methods for doing so, which involves using anywhere from daily to monthly charts to determine the trend of a current market direction, whether it is stocks, forex or commodities.
High-frequency traders cannot make money on spread out trading, by holding onto a stock there is nothing for them to capitalise on. The advantage they have over individuals is the ability to make many trades within milliseconds and investing over a longer period of time takes this advantage away.
Step Outside Your Comfort Zone
HFT is done by computers engineered to use complex algorithms. They are programmed to follow set formula so one of the ways to potentially beat them is to react based on human instinct, but through stepping outside of your comfort zone.
When it seems like the obvious choice to go long, do the opposite and go short instead. Don’t invest too much in case it doesn’t work out, but you will be doing the opposite to a high-frequency trader. This aggressive approach can lead to successes against the odds and beat HFT every so often.
Have a Clear Escape Route
If you follow the above tip, ensure that you have a clear escape route and plan for taking profits in place. It is a dangerous game attempting to beat a computer, so having a backup is essential. This should involve setting appropriate stop losses and limit orders.
Following the market closely and using custom indicators to generate trading signals with a reliable trading platform is a good way to go toe to toe with HFT. This uses expert advisors when it comes to creating a trading strategy and allows for one-click trading to react as quickly as possible.
Use Counter Algorithms
Those with plenty of time and resources available can even invest in technology and software to launch counter-algorithms to tackle HFT. Buy-side trades will attempt to counter aggressive HFT strategies by randomising your trading behaviour which prevents any high-frequency traders from predicting your next moves. This can throw them off and help you profit from trades and investment action that would otherwise not have been taken.
If you are feeling brave and willing to take on any HFT then implement one or more of these strategies and see how successful your trading will become.
Alexander Honeyman is a Financial journalist with 6 years experience, specialising in emerging markets, business law and currency exchange. MA Journalism graduate from University of Westminster, London.