Gilbert “Gman” Mendez is the Head Trader at SMB Capital.

Many traders focus on trading ideas and trading setups and forget to develop execution skills. I do not believe in just finding the setup, identifying the proper stop, waiting for the entry and bang you are done. I would even argue that with the proper execution skills you can make money on a trade setup that did not work out. Today I want to offer an execution trick I use everyday for my trading that gives me the opportunity to be wrong on a setup and yet be able to profit from it in some cases—heads I win… tails I win.

There is a linear relationship between the risk and probability of setups; normally the higher the probability of the setup the higher the risk in the play. Conversely, the risk is the lowest when the probability of the trade is fairly low. The execution “system” I propose takes advantage of this concept: Start a small position when the setup is developing or when the probability is lower and use the open profits to press on your normal entry. This allows you to have more size for the actual break, have a much better average entry price, and have a lower risk, or even no risk at all, on the play.

Let me illustrate this with an example. Let’s take a look at the following chart of LVS where we wanted to be involved if the stock got above 20.5 as it is a big technical level on the daily and weekly charts. The average trader would look pay the break and put a stop below a support area, most likely around 19.90.

The way I would look to swing trade the play is by initiating with a small position on the pullback to the trend line (around 19-19.20 area) while risking a very small amount and adding size on the actual break at 20.5. For the sake of the example let’s just make some assumptions: One, I would want to risk $1k on the break out play by paying 20.5. Thus I would only be allowed to pay for about 1600 shares. Two, I want to risk only $100 on that first trade – the buy into the pullback of the trendline. Three, my hard stop for the whole trade is 19.9 after buying the break. Four, I have to use my tape reading skills to determine the stop in cents on my initial trade to figure out how much size I can start with.

So say you pick up 500 at $19 and risk to below 18.8. If that trade holds and you get the break at 20.5 then you end up with 500 @ 19 + 1600 @ 20.5 = 2100 @ 20.14. So if the trade doesn’t work then you only lose 24c or $504 on the trade.

But what if you saw something on the tape down there and were able to spot a place where your risk would have been 5c instead of the 20c from the previous example? Then you can pick up 2k shares on the first trade and you end up with 2k @ 19 + 1600 @ 20.5 = 3600 @ 19.66 on the break– twice as much size as standard break trade and with an average price a whopping 25c lower than the stop for the entire position. If the trade were not to work out you would still end up making about $864.

You can use this concept for any other type of setup. We have one trader at our firm that does this very well and for almost every single one of his trades. Always starts by risking about $20 on a scalp trade and leverages that first entry to make $500-1000 trades. Yes he doesn’t crush that many of them but you can’t beat that risk:reward.

So there you have it a simple yet powerful way to minimize your trading risk. Yes, you will get stopped out often on the initial entry but that is why you do shouldn’t risk much on those. But the key to this is that you need to develop tape reading skills to be able to spot those places for your first entry. The better you are at identifying your risk on that initial entry, the bigger your trade will get on the confirmation. And when the stock trades cleanly and you get lucky you can really crush it while taking NO big risk. For the record I legitimately hit the bottom below 19 in LVS but was able to get back in MUCH smaller above 19.5 and then pressed above 20.2 and 20.5. That was a little chipper.

Happy trading!

I have a degree in Mechanical Engineering from Columbia U. Although my days of analyzing control systems and playing with complex math problems are long gone, I still use plenty of those analytical skills to quantify my trading performance.

Seriously, I am so meticulous about my numbers that even Mike, Partner at SMB, thought I was a spy for another firm when I first interviewed at SMB. He thought I was just asking too many detailed questions about performance, risk/ reward on trades, etc.

According to him all those questions only meant I had to have been gathering intel for another prop shop – and there were a lot of them at time trying to play that game just for the record. Actually, I was just being myself, a true number cruncher at heart.

For today’s column I wanted to give you an inside view of how and why I review my trading numbers. Keep in mind that I am a high frequency trader and thus my system requires this kind of analysis, but the same approach towards reviewing your work will serve useful for those not as active. So let’s dig right in.

First, let’s tackle the issue of why it is worth spending the time having a routine to review your work. Though not obvious to most traders, it provides a framework for looking at your work in an unemotional way. Often, we become emotional and overweight the results from any one trade and conclude erroneously whether that is play that must be kept/eliminated from our trading.

Secondly, it gives us the ability to quickly to really see how we make/lose our money. And most importantly, and with the right record keeping, you can tell with excruciating accuracy when the market conditions change and when it is time to shift gears in your trading mentality.

I like to keep track of the following stats that I find useful for my own trading. It has been really more by trial and error that I have come down to this relatively small list – it used to be much bigger. But this list works for me:

• Performance and Volume per time of the day (premarket, open, mid day, close, after hours).
• Max size during the times of the days vs their profitability and percentage of big winners.
• Risk/Reward per trade setup – I have my trades broken down into three categories: A, B and C. A-trades being the ones I have most confidence/size/risk on, and C-trades being the least probable trades that I treat as scalps.
• Profitability per stock and per sector.
• Profitability Longs vs Shorts.
• Profitability per market setup: I want to know how my days is tight up to a trend day, inside day, or just range bound day.
• Profitability per news item: I want to see how my results are for stocks gapping up/down big, stocks with upgrades/downgrades, stocks fresh with earnings (mixed, heavily weighted to one side), secondary offering pricings, etc.
• Average holding time for my different trade categories.
• Liquidity adding percentage per time of the day.

During the weekend I take a couple of hours to go over my results from the week and try to find some patterns. I want to find out if the market conditions have shifted so I know where to spend most of my mental energy in the coming days.

Do I play more C trades and be lighter on my A trades? Do I just load up on my A trades but reduce my price targets to about half of what I usually shoot for? Is my data meaningful or is it littered with emotional/angry trades? If so, then what must I do to correct that mental state? You get the point. The more time you spend on this, the closer you get to knowing who you are as a trader.

Monthly and quarterly I look at my results and update my stock Ban list. These are the stocks that should have a charity named after me, those I just day in and out single handedly donate tons of cash to. Every two quarters I make an effort to give the stock one more shot to come out of the ban list. But normally they are in there for a reason.

In the end what matters is being overly meticulous about your results but only AFTER you have developed the skills to perform day and out. I am at a point in my trading career where I feel I know myself as a trader pretty well and now I am just trying to cut the fat in my trading. Take, for example, a recent analysis I started doing:

I wanted to look further into my trade categories (A, B and C) and do a breakdown on how much I make and lose on each of them. I am trying to figure out if there are some silly losses I could eliminate all together. Doing this analysis showed me something I hadn’t seen before. All of my little losses (paying for information in a stock if you will) could amount to about 50-60k a month in my trading. So it is my recent quest to figure out how to cut some of that fat and put that money back in my pocket.

Again, it does not matter how you analyze your results but you must have a way to look at your numbers from a quantitative point of view. And you must use your journal as a way to help you keep track of your progress. Yes we all have different styles, time frames, risk parameters, types of trades, etc, but in the end we are just trying to squeeze money from the market consistently.

Happy trading!

Gilbert “Gman” Mendez is the head trader at SMB Capital.

Gilbert “Gman” Mendez is the Head Trader at SMB Capital.

The volatility is coming back to the market. Although just not in the way we are used to. This market is punishing those who trade strictly off of old school market patterns and rewarding those with trading skills. Let me explain.

Over time we have found intraday patterns that allow us to stack probability on our side. Here are some common ones:

• We do not buy stocks intraday that have broken long term support and vice versa
• We do not short strong stocks that are consolidating at the highs of the day and vice versa
• If the market gaps up and establishes a tight range on the open it is okay to play the longs on the break of resistance aggressively
• If the market is trending up you should be looking for strong stocks to buy and spend less energy on the weak.

When you possess the knowledge and the market cooperates you can be sloppy with your execution and be often rewarded. As knowledge-based traders you need to have a huge tolerance for pain as the real stops on these plays are often wide. Further, as such trader you can expect to have big daddy swings in PnL, especially when the market is just not cooperating.

One of my traders found the following clip which is quite representative of what a knowledge-based day trader (KBT) — represented by the fancy trick guy — may experience in these sessions. Mother market just waits patiently and quite literally … well I’ll let you watch the clip.

Let me show you a graph of SPY to exemplify what an average day in the market is like with the HFT algos in full force:

The circles above represent areas where a KBT trader may have found confirmation that they are either right or wrong. Let’s talk about them in more detail from left to right

1. This break confirms that the market may go higher after taking premarket resistance with decent volume.
2. This one confirms that the break in 1 was fake. Most would get out. Some with a higher tolerance for pain would have stayed in or even lightened up
3. A new high getting ultra aggressive and chasers to get back in full tier… But there is zero to no follow through after entering and it is all pain from there.
4. Assumes the trader finally threw in the towel and gave up. The longs are now looking at that 5 min flag to get in on the short side.
5. Again market yo-yos to the other side stopping out shorts. The circle highlights a possible flag entry for longs looking to add and those not involved waiting to get in.

As a better exercise I ask you to take a look at any In Play active stock (AAPL, AMZN, GOOG, JPM, GS, etc) and try to trade the “trend” using knowledge based patterns for any day this month. My favorite days to watch your account get slaughtered in amusement so far are Feb 1,3,8,9 … Good luck with that.

So how do we combat these shenanigans? In my opinion the only way to do it is to move onto a skill based system where you are practically trading move-to-move. Yes, it means grinding out money more actively. But if GS is doing it and crushing it, why not join the party? This requires you to be more patient. Be the guy in the video sitting on the sidelines waiting for that trade, and when you see it then crush it … crush it like a grape. Happy trading!

This week Gilbert “Gman” Mendez — Head Trader at SMB Capital — offers instruction on trading the open:

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We are proud to have hand-selected SMB Capital as a partner to offer our audience products and services to become better traders. To learn more about their new Reading the Tape course, click here.QQQQStocks

Gilbert “Gman” Mendez is the Head Trader at SMB Capital.

All my pre-hybrid sketchy experiences with NYSE have left me with a sour taste. If you were to sit at my desk, you would hear how I’d pay higher ECN fees to EDGX or get worse fills rather than to give any business to NYSE. I refuse to send any orders through them. And it is not like my 50Mln shares a year would really make a huge difference. Call me loco but I just don’t give them my business.

Although, while reviewing my numbers from last year I realized that being overly stubborn about this cost me close to 40-50k — and that’s just a low ball. Talk about a self-imposed rip. In the words of Chaz played by Will Ferrell in Wedding Crashers: “What an Idiot!!”

So, coming into this year I made changes to my execution hotkeys. I added NYSE sweep keys and I moved them up the ECN toggle list for bidding and offering stock.  And while my ECN fees have come down slightly, I am disturbed by the shenanigans of how my orders are treated. Let me give you a couple of examples.

First, I must admit I have never been a fan of stop orders. But now that I have way too many positions riding at the same time, it is the only way I can manage my risk. Nonetheless, I only use orders triggered by prints locally on my computer to route through ARCA. I have always felt that stop orders that reside at the NYSE exchange can be manipulated. The exchange can argue all they want about the floor specialist not being able to see the orders, but I find it to be too big of a coincidence that stops too often go off at some mysterious prints. Check out what happened to the trader who sits next to me who put in a NYSE buy-stop at 45.24 for 100 shares to cover his short.

Someone please explain how it is possible for a buy-stop that is hosted at the exchange to go off when 45.24 prints but does so only by printing the 100 shares that were in the buy stop. Coincidental? Maybe. Sketchy? Very!

But wait let me show you my personal favorite these days. Getting my orders front run by NYSE. Let me illustrate what this looks like on the tape with the following short clip:

This front running nonsense happens to me at least 5-8 times a day — often when I have size in a position. I am starting to wonder if I am really saving that much money by trading again with my boys at NYSE. I really do wish some of those tens of thousands of dollars that I annually “contribute” to the SEC actually went toward making the system a bit more transparent. It disgusts me that I have to deal with these shenanigans. I am all for businesses making money when offering a service, but this is just ridiculous.

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I want to start off by wishing everyone a healthy and chopalicious (insanely profitable) new year. I hope everyone enjoyed the holidays and the time spent with family and friends. I got a chance to take some time off and feel recharged and ready to grab this bull market by the horns!  And oh I am about to be the new owner of a chocolate lab.

I wanted to take a break from my articles on HFTs and Tape Reading to talk today about my views on the market and my expectations for the new year as a short-term trader.
At the beginning of 09 the market appeared to want to go to zero (or something like that). After some impressive volatility and volume we put in a bottom and rallied much faster than most market wizards had anticipated. Then going into the later part of the year the SPYs consolidated in a very tight range. There were no signs of a major pullback. Boy was that not fun to trade into end of the year!

My job is Trader (well Head Trader to be most exact) and not Analyst. I read many blogs on the weekends to keep the macro picture and fundamentals in perspective. And there are some very compelling arguments for a market retracement and some good ones for higher prices. But as a short term trader the price action and market psychology is my leading indicator. And it is not looking pretty for the shorts let me tell you.

Think about it, there ought to be some large funds that were hoping for a retracement to get in, or most likely, increase their stake. There are also some funds shorting this market hand over fist betting the worst is not behind us.  But every possible break attempt to the downside has failed miserably. And then there are those sitting on large longs not pressed to lock in gains because of this.

Now coming into this year, we have worked off a bit of this overbought condition with that tight consolidation. Underperforming funds will be forced to chase this market as it upticks without them fully committed. Those already heavily long are looking to press their bets. And those shorts will be forced to ride the pain train and cover higher.
And the price action during the first three trading days of the year seems to confirm this bias. There has been some serious rotation of money into sectors, not just individual names.  On Monday and Tuesday we had Financials and Casinos partying like college kids at a toga party. Wednesday we had oil services and metals/commodities working in unison.  The next couple of days I wouldn’t be shocked if we see solars, consumer staples, retailers, and so on just get pumped with fresh money.

With that said I am very much amped about this year. It should be a phenomenal trading year with or without the HFT nonsense. I have spent quite some time thinking about my trading and creating a roadmap for this year. I created my plan and it is time to execute it. And on that note Charles Kirk wrote a fantastic piece on how to go about creating a roadmap for the year. You may read the article here. Happy trading!

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Gilbert "Gman" Mendez

It seems the chatter about High Frequency Algorithms has gone down a fair amount. Maybe as intraday traders we have become desensitized to their shenanigans and have learned to live with the frustration they bring to our business. Or maybe there really isn’t much to talk about. How many times do we need to hear the schpeel about how they make the market more efficient? yada, yada, yada. Instead of writing – complaining even – about the HFTs I want to talk about some of their characteristics.

I have been a bit out of the loop in the past few days due to health reasons. I am currently battling a silly case of the flu. And let me tell you there are only so many 16-hours days of sleeping I can handle. So as I lay here awake in the middle of the night staring at lady liberty I can’t help myself to think about how these dopey programs work. I can’t imagine them being that complicated. I mean speed is the name of the game, so overly complicated mathematical computations are out of the question.

Thinking back on my engineering days and the cheerful lectures (sarcasm?) on computational nonsense I recall a few things. Linear systems are easy to program and computational friendly. From a mathematical standpoint this boils down to average price and rate of change in price of a stock (think fear/greed thermometers if you will). Further, common sense tells us these algorithms are dependent on volume and liquidity to run their show. So an accumulation/noise algorithm tries to keep a low rate of change in the stock while there is light volume, giving a chance to a magical moving average to catch up to it provided there is enough liquidity in the stock.

I know I have now lost some of you with all this mathematical gibberish. The point I’m trying to make is simple. The more controlled a stock is (low rate of change) the more likely it is for HFT algorithms to run us over. Think of consolidations, these were levels where we as traders would take considerable positions in anticipation of bigger moves. We would over-leverage our positions knowing our risk was well defined. As the rate of change in price would pick up in the opposite direction we had thought we would exit assuming we were wrong.

But what if the program would just drop the level right before the magical average was about to catch up to it? Then as traders start to puke positions the algorithm is able to get significant volume at a slight discount. Those who just exit their positions realize what happened and scramble to get back in now altering the rate of change in the stock all together leading to the actual move. Just “simple and elegant” as my calculus professor would say.

How this is useful information to trading is the important part of the puzzle. I chose to trade a bit aggressively during times of high volatility (steep rate of change) and when there isn’t much or too much liquidity for programs to run their show. That only seems to take place in premarket, after hours and the first 15-20 minutes of the open. At all other times I am very careful of not getting in plays that “seem too obvious” or when the rate of change seems to be about flat. I rather wait for the volatility and volume to manifest itself to come out and play.

That doesn’t mean I am suggesting that you should consider start chasing moves in a stock as profitable strategy. I am suggesting that those struggling should consider developing momentum trading skills. I am also suggesting being cautious around points of low volatility.  These are the levels where stocks can be often “manipulated” or as the SEC would put it, more efficient. For now, I am off to pop some Nyquil to make my immune system more efficient hoping I can sleep this off and make it to the open tomorrow. Happy Holidays!

We are proud to have hand-selected SMB Capital as a partner to offer our audience products and services to become better traders. To learn more about their new Reading the Tape course, click here.

The word on the street is that intraday traders are frustrated. The rules of the game have changed. Most high probability chart setups in between important levels are being manipulated by the high frequency algorithms. If you are an active intraday trader reading this, I guarantee you have been a victim to what I call the screw job program. Let me explain.

The highest probability trade for a well capitalized algorithm is the trade where it is guaranteed emotional order flow. By emotional I’m referring to the order flow that comes out of positions where traders just want out – our stop orders.

Consider all of the high probability plays: flags on strong/weak stocks after a drive, consolidation, support/resistance at important levels. We all trade them. We size up as the play develops in our favor and we trade them quite similarly when the play goes against us. We bang out of the stock when we assume we are wrong (especially when we have size).

Let me offer an example of a common screw job program. A stock drives on the open, comes off very little and starts to consolidate close to the high of the day on a tight range for a significant period of time. You can spot plenty of buy interest on the bid, the buying is clear. The stock spends so much time consolidating that the VWAP and moving averages start to catch up to the price action. You see a tremendous opportunity to “load the boat” with little risk on the consolidation calculating the stock has another leg higher.

The stock takes the top of the consolidation with volume and you add to your position. You know you are in the driver’s seat. I start the theme music to “Jaws”, and our desk’s group of traders I have affectionately termed the Shark Tank, communicating an excellent trading opportunity to the firm. Then out of nowhere there is more selling interest, the bottom of the consolidation drops and you bang out of the play. 15 minutes later the stock is making new highs without you in it. Talk about getting bitten by the market. Sound familiar?

Check out these charts of BAX to illustrate my point from above. One shows the intraday price action on a 3 minute chart while the 15 min and 60 min chart give us a clue of the upside of the play.

I know I have been a victim to this screw job algorithm at least 30 times in the last month.  But lately I have started to catch up to their nonsense and have had to make some adjustments.

1. Increase the stop loss on the position
2. Trade with less size until witnessing the screw job then lay into the position when it gets back above the level.
3. Stay light or flat on the setup, wait for the screw job and then add while the screw job is taking place. Then lay into the position when the panic subsides.
4. Trade more in premarket and after hours when there are very few/no algorithms.

Dr. Brett Steenbarger once told me:  turn frustration into opportunity. Doing the steps above have helped me tremendously. Clearly the algorithms have some advantages but the trader who adapts will always come ahead. Happy trading!!

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We are proud to have hand-selected SMB Capital as a partner to offer our audience products and services to become better traders. To learn more about their new Reading the Tape course, click here.

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