Chapter 2: Strategy enhanchement
Why exploit computers
Exploiting computers is becoming an increasingly effective strategy as algorithmic trading continues to grow, both among institutions and retail investors using trading software.
Computers, while incredibly fast and efficient at processing data and executing trades, can also be quite exploitable because they follow predefined rules and patterns without the emotional response that human traders might have, especially when facing losses.
This lack of emotional reaction can create opportunities for savvy investors to capitalize on predictable behaviors in the market, allowing them to gain an edge over algorithmic traders who might not adjust as quickly to unexpected market changes.
How does the computers work
To figure out how to exploit computers in trading, we first need to understand how they operate. These algorithms work by calculating various ratios and metrics to predict stock movements. However, they tend to be very short-sighted, focusing primarily on numerical data and immediate trends.
They often don't account for qualitative factors—like a company's innovation, leadership, or market positioning—that can create future value beyond the numbers.
This short-sightedness and inability to recognize deeper, value-creating factors behind the data are their greatest weaknesses, providing opportunities for human investors who can see the bigger picture.
Exploiting them
The best way to exploit computers in the market is to focus on long-term thinking, as this approach consistently outperforms the short-sighted nature of algorithmic trading. This strategy alone can give you an edge, but findingbeyond the numbers is key if you really want to capitalize on computer weaknesses.
For example, imagine a company with an excellent reputation that's driving revenue growth, but this isn't yet reflected in the data that computers analyze. You're ahead of the game if you buy the stock as soon as you recognize this potential. By the next quarter, when the revenue increases and the stock price rises, the computers will only start buying on a momentum basis—much later than you did. This allows you to benefit from the early gains before the algorithms catch up.