Thursday, July 30, 2009

Why do traders ignore so much data?

Stock market trading is driven by data, however most systems and the traders that use them, simply ignore huge swathes of data - it's been written off as just too hard. For instance BHP, Australia's most traded share is bought and sold 15-20,000 times a day - and that's just in Australia. Let's think about that for a moment, some of those trades are institutions, some are Mum and Dad investors, some are professionals, some are automated computer (aka algo) trades. So what do systems do to analyse those trading patterns, who is buying in? who is selling? etc, basically the systems do nothing - those 15,000 trades are reduced to 5 figures - Open, High, Low, Close and Volume.

Reducing all the trading data down to 5 figures made it easy (at least easier) to analyse, that was especially relevant when you had to hand draw your charts, and work with paper and pencil. The thing is we don't do it that way any more, my laptop has enough power to store and analyse the ASX100 live so why do my trading tools ignore that power and only allow me to look at history as OHLC? I reckon the answer is cultural, even though trading is meant to be the biggest user of the most advanced technology, at it's heart most traders are still using techniques that have been around for a century. They simply use them on really fast hardware.

As a little taster of what's possible, once you use the raw data you can split out the big institutional trades, identify certain types of algo trading - orders for 11, 12, 11, 12, 13, 12 ,11 etc shares. See if there's a stampede by the bit players into (or out of) a share all kinds of real world knowledge is there for the asking. Of course what you do with it, is upto you.

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