While Prop traders around the world scratch their collective heads seeking a logical reason why equity markets have risen in this European crisis off-the-table rally, fund managers are raking in the cash.  As minutes tick by, chart patterns continue to break and day traders struggle to hypothesize technical levels for position entries.  I challenge everyone to trip the light fantastic and contest conventional wisdom of those who analyze capital markets.  Day Traders, executing transactions by hand versus computer, need to evolve or, like the dinosaurs, will become extinct.

Gone are the days where markets are fraught with opportunity to capitalize on volume-based volatility.  The only consistent order flow occurring in markets, in an endless perpetuity of 100-share lot executions, derives from algorithmic trading.  Hand traders, who measure entries and exits based on conventional benchmarks, are a dying. For those who seek to debate this contention, all one has to do is look at the statistics.  

Trading volume is down, big time.  Day traders once constituted a sizable chunk of market volume, but new licensing requirements (Series 56) placed a massive barrier of entry to new blood.  Being that there is such a high attrition rate in the business, the in-flow of volume derived from new traders cannot keep up with the fall-off of the old.  As trading volume declines precipitously, so does the reliability of old benchmarks day traders use to map entries and exits.  Standing on the event horizon of change, one has to look within to find the next edge.  Learn to trade like an algorithm!   

I know you guys are chartists or mathematicians and want to find logical levels for trading.  Trend lines and pivot points, Fib retracements and moving averages.  These are units of measure that others have deemed important for predicting movements in price action.  Big trading houses hire big brains from MIT and Stamford to dazzle us with complex mathematical formulas.  These formulas and complex mathematics seek to substantiate the conventional statistically computed benchmarks.  We spend endless hours drawing charts and trying to make sense of it all. 

Instead of being distracted by all of this noise, step-away for a moment and think about what these benchmarks actually represent.  One thing we all learned in the school yard is that life is not fair.  So why are there indicators that would lead us to believe that financial markets are anything, but fixed?

Analogize market indicators to those used in the automotive business.  You have stochastics, Fibonacci levels, relative strength indicators, on and on that are all trying to SELL you on a particular argument for price action.  In the automotive business, benchmarks like 0-60 time, quarter mile time, 60-0 breaking distance, engine horse power, torque, on and on aim to SELL you value proposition of vehicle performance.  

In order to make an intelligent decision on what kind of car to buy or sound knowledgeable in like-minded company, one must know these statistics across a wide variety of vehicles.  Yet, the vast majority of gear-heads have no idea the engineering and science required to build a vehicle.  Therefore, one cannot gain an edge over someone else.  The only way to generate an edge on the road is through engineering, not identifying levels within known statistics.  Through engineering, one can create efficiencies within the known units of measure or, more importantly, derive new ones.  

Now that you have awoken from the mega-bank and private equity created Matrix, like building a new car, it is time to do some day trading engineering. 

There is a law of parsimony, economy and succinctness known as Occam’s Razor.  Occam’s Razor is a principle that urges one to select from among competing hypotheses, that which makes the fewest assumptions and thereby offers the simplest explanation of effect.  Occam’s Razor further encourages that one should proceed with simpler theories until simplicity, itself, can be traded for greater explanatory power.  As applied to capital market dynamics, stochastic and fibonacci calculus DO NOT constitute greater explanatory power.  They are theorem based and, in the absence of high trading volume, are disproved on a daily basis.

The simplest explanation for this crazy rally in the markets is…  The second quarter of 2012 is coming to a close.  Fund managers across the globe have to generate income for their respective client base or they will not have clients.  The cloud of uncertainty in Europe, all be it temporarily, has lifted.  Like with the rally that started in Winter, 2011, history is repeating itself. 

Fund managers have become offer lifters and are underweight equities, as an asset class.  They are gobbling-up the asset class ETF by ETF in a chase to produce second quarter profits for clients.  For those struggling to find support levels and expansion points, stop focusing on the trees and look at the forest.  As you were stricken with the condition known as paralysis by analysis, the market bounced almost 10% from the bottom.  Where is the top?  That is perhaps the most irrelevant question of them all when your client says to you, at the end of the quarter, “where is my money?”

If you are asking yourself the same question, where are my trading profits, come join us in our trading room and we will find the answers, together. 

Go to www.wallstreettrading.com and register for your free trial.    At Wall Street Trading, you will learn what all trading schools, chart pundits and other so-called experts fail to teach in seminars. 

We will show you how to spot the algorithms, illustrate their trading techniques and smash those mother f’rs into trading profits!

See you in the room!