In this part, we will discuss what we have got to do in order to identify and follow the order flow of the Aggressive High Frequency Traders in the E-mini future markets.
What do retail traders need to identify and follow the Aggressive HFTs in Future market?
In order to identify the aggressive HFTs, we need (retail traders) to change some crucial points in our trading so that we can adjust our level to the aggressive HFT’s.
Let us identify those crucial points that make the difference between aggressive HFTs and retail traders (small traders):
Type of Trading
Aggressive HFTs don’t trade manually as they use algorithmic trading strategies, whereas most of retail traders trade manually.
On the grounds of this, to be able to identify the aggressive HFTs in the order book, you need to switch to algorithmic trading (automated trading).
It’s as if the aggressive HFTs are moving in the order book with a Bugatti Veyron. The retail traders, on the other hand, are moving in the order book with a bicycle.
The benefits of automated trading in future market are huge compared to manual trading, because the traders avoid psychological problems to some extent.
When I was trading manually years ago, I couldn’t follow my own strategies. Once I opened a new position, I felt stressed to death. Then after a short time, I cut my losses before the price hit my stop loss, otherwise I closed my position before it hit my take profit.
Algorithmic trading strategies execute trades with zero emotions.
Algorithmic trading can scan hundreds of markets’ order flow simultaneously (depending on the server) to find the best opportunity that will generate profits in micro-seconds, but for retail traders it’s impossible to read the markets with this precision.
The trading strategies of some retail trades depend on the common free indicators (RSI, moving average, Ichimoko, etc) where you can find all trading platforms (X-trader, Think or Swim, NinjaTrader, etc).
In contrast, other retail traders rely on reading the order flow in the market depth without any algorithmic system, still it’s not enough to find the aggressive HFTs and follow them.
Aggressive HFTs’ strategies are not based upon any standard indicator, nor any fundamental news. Their trades depend on the direction of other traders in the order book.
According to Dr Andrei Kirilenko and Jonathan Brogaard, Aggressive HFTs are 99% order flow traders. That is to say, from the gathered information in the order flow, they develop a lot of strategies like: Arbitrage Trading, Exploratory trading, Absorption trading, manipulation by Iceberg, manipulation by Quote Stuffing and a lot of strategies (legal or illegal, we don’t know). (In the next parts, we will talk about this strategies)
One of the biggest strategies known in the field of HFTs is buying the Bid and selling the Ask. This strategy is done by passive and mixed HFTs (Liquidity providers), but it requires a lot of speed. Consequently, it cannot be executed by retail traders.
There is always a war between the HFTs to get the next price first (limits in Bid and Ask) in future market, because it can generate millions of dollars per day for the fastest HFT firm.
The retail traders use a simple data compared to the High Frequency Traders, who use a high quality tick-by-tick data where time is stamped to the nanosecond.
Speed is one of the biggest points that distinguish HFTs firms from other traders including HFTs.
The retail traders can gain some speed, but not like HFTs, if they opt for two things:
- Collocation in the exchange (can be cheaper if you take the standard server).
- Direct Market Access (DMA), your order will go directly to the exchange; no broker to handle your position, or to send it to a dark pool or to a market maker.
As a conclusion, the retail traders have got to identify the aggressive HFTs in the order flow via algorithmic trading tools and a high quality tick-by-tick data with level II. Moreover, to be able to follow them, retail traders need at least a standard collocation in the exchange and a direct market access.