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The Other Guy, by James Sogi
When negotiating, cross-examining, making a deal, sparring, and yes, trading, it's always good to think about the other guy. What do we know about him, what is his motivation, his fear, his methodology, what is his weakness, his strength, what makes him tick, what will make or break the deal, or make or break him, how he reacts to the initial offers, jabs, moves, questions. We've seen the operator who only thinks only of what they themselves want, need, their own fears, and operate in kind of a bubble. They are often played into comic figures by comedians, but the effect of such behavior in markets is tragic. The masters at their crafts know what the other person is thinking and will do in advance.
A perfect example of thinking about the other guy was Wednesday's false mid day break down in both Sp and Friday's Goog's false break down. What are guys with orders placed just below the prior low price thinking and why do they put orders there and what will the effect of those orders be? They are thinking if long, "I'll hold the stock, but if it goes down below this point I will sell." That type of order is ephemeral. The other group is the bear order waiting for momentum and want to sell as the price breaks expecting a free fall. Over the past few years we've seen this tactic fail over and over, so for now, that thinking can be considered ephemeral, but as with all cycles, look out for changes. It used to work well before.
What do the 'locals' think? From looking at their orders and how they move their orders, and get filled, it looks as if they try to follow momentum on a daily basis. If the the order flow is up, they tend to pile in that direction. If the order flow is down, they tend to pile in that direction. Many appear to be "locals" in the 100-300 lot range for whom commissions might not play as big a consideration. I've heard that "they" like to follow momentum and order flow, that they often do not stay in long. A similar group, including a large subset of locals, are the "day traders" using similar size. What are they thinking, what is their habit, what are their weaknesses.
Another group is the market makers. They sit on either side of the market with size and jockey back and forth. It's a fast fast game that goes on all day long, and is a battle of the borgs. Programmers jockey their algorithms controlling the API with the spoils to the fastest and most adaptive. It's a fascinating game. Humans are not ruled out, as machines have their limitations and humans have an edge over them, not in speed, but in flexibility to adapt to the fixed rules of machines. That is the machines weakness, they just operate under fixed rules. Plus with only 5 levels of depth shown, their ability to see is limited to 5 levels. They are blind beyond that. This causes much of the price action we see during the day.
Jim Sogi, May 2005