When Information Goes Bad
Markets are about information. We get bombarded every business day with millions of bits of information; almost all of it is useless. If you watch CNBC or Bloomberg every day looking for that tidbit of info that is going to make you money, then you are the chump at the poker table.
Bert Schools vegas on Information Theory
“Hey kid, follow me.”
When I had let it be known to the head huckster, aka the branch manager, that I wasn’t going to be doing stocks any longer, and that commodities were my future, he moved my desk over next to Bert. I’m in the fortress city!!
At the time, I knew that Bert was extremely bullish on lumber prices, but what I didn’t know was that he and his managed accounts were long about 700 contracts of lumber futures that he had accumulated over the previous 7 or 8 days.
When I came into the office that day, things were already buzzing. He pulled me aside and said, “Watch and learn today kid.” I knew this was code for shut up, and keep your eyes and ears open.
Lumber opened limit up. At this point, Bert and the boys were up about $5 million. Somebody yells across the bullpen at Bert, and he raises his hand to stop, as if to say, “Ain’t got time now, go away.”
There are about 10 people around our desks, not moving or saying anything. Bert is staring at his quote machine intently. He screams for the order clerk to come to his desk. She gets there to hear him say to her, “Sell 100 FOK [fill entire order or kill it] at limit up, when I tell you to.” She fills out the order ticket and starts to walk away. Bert stops her and says, “Get an order ticket ready to sell 700 at the market.” She fills that one out also and walks away.
I’m sitting there stunned. Stuff is limit up man, what are you doing, I’m saying to myself? Prices obviously got a long way to go on the upside before this move is over.
Half an hour goes by; then an hour. Bert looks like a statute standing at his desk, eyes intently staring, first at the commodities tape, then at his quote machine. Suddenly he shouts to the commodities clerk, “Put the FOK order in!” She yells back about 10 seconds later, “OK, it’s in!”
About 20 seconds later she yells back to him, “ENTIRE ORDER NOT FILLED, IT’S KILLED!”
ATTENTION LUMBER PIT TRADERS:
IF YOU DON’T KNOW BERT, YOU SOON WILL
Bert immediately runs from his desk to the commodities clerk’s order desk, yelling as he goes, “SELL 700 AT THE MARKET NOW! NOW! GO, DO IT NOW!”
I see this, and I’m about to wet myself. I’m looking at him and the commodities tape; back and forth. Lumber stays limit up and then starts to back off about $2 maybe $ 1.50 and then goes back up to limit up. Bert sees this and starts to giggle. He knows.
Bert goes back to his desk, sits down, and asks me to get him a cup of coffee. “Sure man, anything you want.” He’s relaxed now. About 10 minutes later he gets his fills from the floor, and adding up everything, he and his buds are up about $5.1 million.
ONE HOUR LATER, LUMBER IS LOCKED LIMIT DOWN!!
I still can’t adequately describe, all these succeeding years later, the emotions that ran through me watching this unfold on that day. I remember asking him how he knew, and what his response was. “Conference room, tomorrow morning 8:00 AM. Explain what I did and why I did it. You got the rest of the day to figure it out. Isn’t that hard really. Gotta go now. Don’t be late!” He then walks out of the office.
I sit there the rest of the day, and into the night. When I get home I can’t sleep. I’m putting the pieces together, retracing things that I saw and heard. Slowly, over the hours I get it.
I get in the next morning, and Bert is sitting there waiting for me and he says, “So, what ya got for me?”
“Bert, how many more FOK orders were you willing to put in if that first one had gotten filled all at limit up?”
Bert smiles, takes a couple of seconds and then responds, “You got it kid. Now, let’s go trade the day.”
Bert knew the limit up opening was exhaustion. He used the first FOK order as bait. He wanted to see if it was filled. By not getting it filled, he knew the limit up was weak. This info told him he had to act fast to be the first to start selling before everybody else figured it out. That first break off of limit up was his order. When it went back up, he knew from that first FOK that got killed that it would not last long at the limit up price. Essentially, those fills were the last ones to the party and were now going to be trapped at the highs.
Welcome to the PhD. Program in trading.
INFORMATION THEORY = ACTION + INFORMATION +MORE ACTION = MONEY IN THE BANK. Class dismissed.
It's All Coded In For You To Profit
“The Vegas BFSG Algorithm” has 8 specific pieces of information theory coded into it IN REAL TIME. Is it infallible? Of course not; absolutely nothing is. The edge is in the probability distribution of being at or near the high or low of the move and therefore getting good prices and fills and booking profits. I don’t care about buying the low and selling the high. What I care about is when I’m long it goes up AND I GET OUT NEAR THE END OF THE MOVE, and when I am short it goes down AND I GET OUT NEAR THE END OF THE MOVE. Period. End. Of. Story.
Today’s Price Action
We entered today’s trading action in “buy mode” from the algorithm. At 1:15 AM [Chicago time] we got a buy signal at around 1707. A couple of hours later we got a confirmation sell at 1716. Net gain for the day of $ 9.00 / oz.
As a side note, there was a fantastic move in US crude oil today and the algo picked it up perfectly. To those of you trading crude, congrats!
Have a good day everybody,