How to Avoid Becoming an Algo’s Target

Larry’s Note: I’m coming forward today to share my most exciting venture since my hedge fund days…

I call it “Benedict Capital.” It’s a near-replica of my former hedge fund, with one crucial benefit: You’re in charge. You place all your own trades, meaning you keep all your profits.

Fair warning: This venture may not be suited for everyone. But it gives the non-hedge fund guy the chance to make hedge fund-like wealth.

If it’s right for you, it could help you create an entire nest egg – just like my former clients.

That’s why I’m sharing the details at a sit-down tonight at 8:00 p.m. ET.

I hope you’ll join me then. To attend, all you need to do is go here to automatically add your name to the list.

Most folks who spend time in the stock market are aware of algorithmic trading.

After all, many hedge funds and institutions use algos to gain an edge and extract profits. High-frequency trading, for example, can scalp lots of tiny profits through complex arbitrage strategies.

You might be familiar with some of these common algo activities.

But there’s one other, less obvious trap that you might miss – an algorithm strategy that exploits where folks place their stop losses.

Yet if you follow some simple guidelines, you can prevent yourself from becoming a hedge fund’s prey…

Tips for Stop Loss Levels

Using stop losses is drummed into us the moment we start trading. And for good reason…

A stop loss gives us a clearly defined exit point if a trade goes against us. That helps prevent a small loss from turning into something much bigger.

But the problem isn’t the stop losses themselves… It’s where we place them.

People often place their stop losses around the same obvious technical levels. And that’s what hedge fund algos can potentially exploit.

For example, if a stock’s price has held multiple times at a key support level (say $100), then you could expect a bunch of people to use stop losses just below that ($99.50 or $99.90). If the price broke below $100, a downtrend could be emerging – hence the reason to exit the trade.

Another common support level is a 200-day moving average. A break below that would also likely trigger stop losses.

But algos can take advantage of these scenarios… They can push (short sell) a stock below these common levels.

They know that a succession of stop losses will likely trigger, causing an avalanche of selling. The algos can buy the stock back once the selling dies down, picking up a quick and tidy profit.

For a trader, few things are quite as frustrating as getting stopped out on a trade only for it to quickly rebound.

But there are some simple things you can do to avoid this fate…

Avoiding the Algo Trap

One strategy you can use is a slightly wider stop level. The key, however, is not to increase your risk. So that means trading a smaller number of shares with a wider stop.

For example, if you were watching a $100 key support level, you could put your stop at $98.90 instead. The goal is to place it out of the algo’s likely range (and reduce your position size accordingly).

Another strategy is to use the Average True Range. So instead of placing your stop at a fixed price level, you could choose twice the stock’s average daily range over the previous 14 days.

That way, your exit strategy is clearly defined… and helps you avoid being a part of the herd.

Similarly, you can use Bollinger Bands, which are typically set at two standard deviations above and below the stock price. This means roughly 95% of the price action should happen within the bands. Again, you could set your stop to exit the trade if the stock falls below the lower Bollinger Band. That way, you still have a clearly defined exit plan without becoming the target of a hedge fund’s algo.

Alternatively, there are also time-based stops, where you exit the trade after a fixed period of time. This can circumvent algos based on price altogether.

As you can see, you have a number of different strategies you can use.

Whichever you choose, the broad goal is not to get caught up with everyone else… and prevent yourself from becoming the target for a hedge fund’s algo.

Happy Trading,

Larry Benedict