Is Flash Trading Profitable?

A type of algorithmic trading used by high-frequency traders that execute trades in fractions of seconds is called flash trading. Generally this approach requires software that automates the trades but it can, in theory, be done manually. Where is this approach to trading useful and is flash trading profitable enough to use as a standard approach to making money in the market?  Flash trading aims to profit for frequent, small price changes although it can work on unexpected, rapid and large price swings.

How Flash Trading Works

The point of a flash trading setup is to see market movements before other traders do. For a fast enough computer setup a fraction of a second will work. However, this approach uses algorithms that are set to read a market situation and execute a trade within a fraction of a second. Ideally a flash trading setup will recognize a market opportunity and produce a trade before the wider market has had a chance to digest any new information and produce trades. In fact, a fast enough setup will have accomplished this before other traders even see the market move.

Does Flash Trading Produce Profits?

Something to remember whenever a trader considers using an algorithmic approach is the saying from the first days of computer programming, “garbage in means garbage out.” In other words, if your algorithm is looking at the wrong information it will spit out nonsense that could be very costly. We have frequently noted that upward or downward spikes in the market are driven by “algos.” The algorithms are commonly very good at reading very short term technical indicators. They are not necessarily very good at understanding the big picture!

Why at Top Gun Options We Pay Attention to the DRINCs

DRINC is the acronym we use for Democrats, Russia, Iran, North Korea, and China. Although these folks can be really bad actors who actions can drive the market, others deserve attention from time to time. An ideal example was when Covid-19 first emerged and the market continued business as usual. For a decade prices had steadily gone up and it was typically profitable to buy a dip because it was generated by profit taking and not anything that would hurt prices long term. When whoever was programming algos in those days believed that Covid-19 was just another version of the “flu” they did allow for worldwide economic shutdowns and millions of deaths in their computer algorithms. This was just like many of the “smart money” folks who said to “buy the dip” as the market plummeted. Some of our profits as we virtually printed money early in 2020 were because we recognized the reality of the situation and some was because we were not relying in a brainless computer algorithm to do our “thinking” for us.

Not All Split Second Trading Decisions Work Out

At Top Gun Options we hedge every single trade. We follow our “pocket checklist” to remind ourselves why we got into a trade and what we expect to get out of it. Much of this could be programmed into an algorithm but the pause to think twice about what we are going cannot happen within milliseconds when is how long a really fast flash trade takes. Very commonly we see the Fed Chair speak and, as he or she is speaking, the market goes up or down only to reverse course within minutes. What we are commonly seeing is algos kicking in and driving prices followed by real live people taking a deep breath, thoroughly analyzing the situation, and placing trades that not only make better sense but also profit from market distortions caused by the “algos.”