StockFetcher Forums · General Discussion · Guru Trader Predators and Prey<< >>Post Follow-up
luc1grunt
622 posts
msg #58099
Ignore luc1grunt
12/13/2007 8:43:27 PM

Found it! Sorry Niko, I thought it was you.....Still one of my favorites.


guru_trader
- Ignore guru_trader 1/20/2006 2:01:09 AM

Here is one view of the markets I find very entertaining ...

Source: http://www.hardrightedge.com/wizard/ss1.htm

PREDATOR OR PREY?

Each timeframe in the market has a completely different set of players. Each one has its own predators and its own prey. Do you know your timeframe? The scary part is that if you don't know and stick to your timeframe, you're going to be someone's prey and never know why.

OK, so what are these timeframes? Let's use a pond and fish analogy. The first pond is the 2 minute timeframe. The others are the 5 minute, 15 minute, and daily ponds. Don't worry too much about the physical property of these ponds. For instance, fish in the 2 minute pond can feed on fish in the 15 minute pond. But, the pond analogy is still useful.

The 2 minute pond is the group that takes money in a way that we call slippage. They nasty little devils are fast and furious. It is amazing to watch them. They are really big fish, with tiny little mouths. They spend their day eating teenies. It takes a lot of teenies to satisfy them. So they have to be quick and repetitive. They'll choke on big pieces of meat (large positions for a long time), so they keep their bites small. These fish are comprised of Market Makers, Specialists, abridgers, and scalpers. These guys are trying to take money from all the other fish - including each other.

The 5 minute pond is full of day traders trying to take money from the 15 minute pond. These are the fish looking for intraday trends. Their mouths are built for 1/4, 1/2 or full points. Where the 2 minute fish worry about not getting enough volume, these guys worry having too much. "Who am I going to buy 3,000 shares from and how will I unload 'em." If they try to eat too much at once, their prey might panic and run away.

The 15 minute fish are big ones. These guys work all day long to fill one order. These are the institutional traders or Market Makers acting as traders. They also worry about how much volume they move, but sometimes they just can't hide it. So, they can't buy or sell all at once. They also have to hide their tracks, because the 5 minute fish are trying to spot them and eat from the same plate.

The daily pond is a funny mix. There are two main groups. There are the mutual funds and the Investradors. (I call them this because when a position goes away from them they become Long Term investors, and when they are making money, they are traders. This confusion between Investor and Trader begets the term Investrador.) Investradors are the bottom of the food chain. They supply the money for all the other fishes. Very kind of them really. Fortunately, 80% of them are philanthropic, so there is always a stream of new funds.

The Mutual Fund fish are really big. They move from place to place in the pond, swallowing great masses of Investradors. How can they do this? Can't everyone see them coming? Aren't they the slowest fish in the pond? Yes to all of the above. So the Mutual Funds must use bait. Mutual Funds swim around with their mouths open wide. Around this mouth are numerous goodies to tempt the Investradors. They dangle Research Alerts, Upgrades/Downgrades, Sector Analysis, cover stories on Fortune Magazine, etc.

Let's take a look at this food chain from top to bottom. All the money comes from the Investradors. The mutual funds eat them alive. However, in order for the Mutual Funds to move around they need the help of the Institutional Traders. Kind of like tug boats pushing a freighter around the bay. So once the Mutual Fund fish eats all the Investradors on one path in the daily pond, he calls in the Institutional Trader fish to help change direction. These fish move millions of dollars worth of Investrador flesh. So they tell the Mutual Fund, "OK, I can do it, but you'll have to wait a day or two." Then they take the flesh to the 15 minute ponds and start moving it. This creates eddies in the waters of the 15 minute pond. A good institutional trader with a small amount of Investrador flesh in a big 15 minute pond can't even be seen. However, the larger the order and smaller the pond, the bigger eddies.

Now the astute 5 minute fish is watching the waters of the 15 minute pond. Here he notices something - a trend. The waters of the 15 minute pond can be very murky. However, it is a little easier to spot these moves in the 5 minute pond. That big fish sometimes gets too close or makes a mistake and the Daytrader Fish spots his action. He jumps in front of the Institutional Trader and steals his pound of flesh and moves on. Institutional Fish don't like Daytrader Fish.

During this entire process, the 2 minute fish run around cleaning up all the little leftovers. Finally, all the Investrador flesh is gone. The pond is red with blood, but the fish are feed.

What pond do you play in? There is money to be made in each pond. But only if you know who your prey is and who is your predator.

You can be a 2 minute fish. Are you fast? Are you happy with making teenies? But remember these guys are cannibals.

You can be a 5 minute fish. Are you patient? Do you mind scanning constantly looking for signs of 15 minute fish? But when it is time to act you better be fast and decisive. And you better like 1/2 point mouthfuls.

You can be a daily fish. Can you handle the big swings in price? Can you watch your stock drop 3 points, while waiting for it to gain 9?

Here's a table to help you evaluate just whom you are competing with:

[Original table here ... http://www.hardrightedge.com/wizard/ss1.htm]

NAME
POND
HOLDING PERIOD
FOOD SOURCE
QUALITIES

Investradors
Random
No clue
No Clue
No Clue

Mutual Funds
Daily
Weeks
Investradors
Huge amounts of money, Marketing/research groups, and a tackle box full of Investrador lures.

Swing Traders
Daily
Days
Investradors
Smart, careful. Decision-making after market hours.

Institutions
15 Minute
Hours
Mutual Funds
Deep pockets, Move Markets over short timeframes, very astute, inside information.

Day Traders
5 Minute
Minutes
15 Minute Fish
Waits for rock solid plays. Decisive. Decision making during market hours.

Momentum
2 Minute
Seconds
Investradors
Timing High Volume, High Volatility Stocks.

Scalpers
2 Minute
Seconds
Everyone
Happy just going click, click, click all day long.

One of the most important follow-on lessons here is what timeframes to watch. Basically, you are taking money from the timeframe above you and giving money to the timeframe below you. For example, if you measure your holding period by minutes, then trade off a 5 minute chart. However, you need to monitor the 15 minute and daily charts for opportunities. Likewise, use the 2 minute chart to monitor that pond for hazards. But remember if you are playing in the 5 minute pond then stay there. Don't move from pond to pond.

Now can you decide what pond you are in? Know your prey. Know your predators.

nikoschopen
2,824 posts
msg #58103
Ignore nikoschopen
12/13/2007 10:12:31 PM

LOL! I too read this article when it first surfaced but my senile brain must have been in a fart mode because I couldn't remember when you asked earlier.

FYI: Better watch out if ure a 15-minute fry because I'm a nasty 5-minute piranha!

guru_trader
485 posts
msg #58110
Ignore guru_trader
12/14/2007 1:30:28 AM

After reading that article, I think about this stuff all the time.

EWZuber
1,373 posts
msg #58121
Ignore EWZuber
modified
12/14/2007 10:19:54 AM

luc1grunt, I'm glad you posted that piece. It supports my contention that the PDT rule is designed to create a class of feeder fish out of those small fish determined enough to brave the waters.
It is designed to force those with less than $25K in their accounts to feed the rest of the fish. So those with the least amount of capitol are prevented from ever attaining any great success and those with the largest amount of capitol gain even more.
Case in point, I bought the QQQQ yesterday as it broke above ST resistance at $51.29. The position closed in the money ~ 0.5% and opened this morning down 1% from the close. So now my profit has turned into a -0.5% loss.
Had I been allowed to, I would have much rather day traded that position and realized those gains. Doing that would have restricted further trading.


luc1grunt
622 posts
msg #58131
Ignore luc1grunt
12/14/2007 1:29:28 PM

EWZ I don't know if I agree with all that. I worked around the PDT as I learned and it likely kept me a bit safe. I wasn't ready yet. It forced me to make solid trades over a time period to realize profits or allow a stop and I really learned risk/reward at that time. I built the account to well over 25k and never looked back. I apologize up front if this offends....not my point. My point is that i realized the only thing stopping me was me....PDT rule was just an obstacle that needed breaching.

...still love the fish analogy. Chewed on some 15 minute fish all day and I'm done.

nikoschopen
2,824 posts
msg #58134
Ignore nikoschopen
12/14/2007 1:54:13 PM

I suppose then ETFs are also included in the PDT package? For some reason, I always thought ETFs were handled differently from the joe-sixpack ordinary stocks (ie. no up-tick short rule ever applied for ETFs).

EWZuber
1,373 posts
msg #58136
Ignore EWZuber
12/14/2007 2:26:00 PM

luc1grunt, Thats fine if you needed that type of imposed restriction to figure things out. I don't think I need it and find these restrictions to be of great hinderance to making money. Particularly being a short term trader by nature.
I could have easily made several winning trades on the Q's alone today, the entries and exits were clear, but was forced to sit by the sidelines and watch because there is no LT trend established.
Just curious, when did you start, how much did you start with and how long did it take you to reach $25K. TIA

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