Software Is a Trader, So Be an Investor
But is there a way to make money off that?
One thing I've noticed this year are trades that have gone against the expected trend. Conventional wisdom compares this with trying to pick up pennies in front of a steamroller, as the FXCC blog notes, but software can always get out before the steamroller gets there. You can't.
I think that even if software isn't that clever, trading against a trend in a cash market can be a good trade for software. Consider a situation where software has a lot of options running the wrong way in a trend. Trading in the opposite direction, in the cash market, may give software the time to unwind those trades without loss. If the trend is of short-term duration, software can trade out of the cash positions later while maintaining principal.
Again, you can't.
With options increasingly driving the train, I expect this trading against the trend to continue, even accelerate. It means cash traders need to hold on a little longer for the expected to happen, but it means that what looks like a market running against you may also be a mirage, machines trying to panic you.
A great example of machines taking advantage of human panic came this year with Facebook (FB) . When there seemed to be trader momentum for it going up, it collapsed. Later in the year, when everyone had turned bearish, the stock started rising. All this was absent real news. Trading was done on the basis of rumor and daily news stories.
It's in cases like this that people get emotional and machines rational. The machines cleaned up on Facebook and they're cleaning up still.
The same has been true with a lot of other widely-traded tech names this year. Amazon.com (AMZN) seemed to be driven higher without any news to justify that. Apple (AAPL) seemed to have been driven lower, also without news. Right now Google (GOOG) seems capable of doing nothing wrong.Are the machines trying to tell you to sell?
They could be.
I have written a lot about the John Henry story lately, as described at Wikipedia.
John Henry was a strong 19th century man who was being replaced by a machine. The John Henry story is the story of the U.S. economy. We keep eliminating labor costs, and increasing the value available for personal labor -- people doing for other people what we prefer that people do.
The story of my generation is of minds getting the John Henry treatment. Middle management isn't coming back, and many sales jobs -- travel agents, brokers -- aren't coming back.