The Pitfalls of Mobile Trading

Connected handheld devices have brought a degree of flexibility to the investment community; we are now able to place trades from virtually anywhere in the world, by simply using our phone.  That power is awesome, and I certainly appreciate it too, but some investors have pushed it too far.

I have been offering proactive investment strategies which incorporate risk controls longer than anyone else on the Internet today; we began at the onset of online trading, much less mobile trading, and over time I found that investors generally have one major limitation when it comes to engaging proactive trading strategies.  That is, most of them don't have the time.

However, with mobile trading many investors suddenly feel as if they now have the time to follow proactive strategies on their phone, but that's not true.  Of course, investors can make a trade, but in most cases proactive strategies require proper timing, based mostly on technical indicators, and I do not know any phone that will provide charting tools capable enough to enable efficient trading.

Not that this is required either, but some investors have multiple machines, simultaneous charting programs, multiple conditional order entry screens, and they are tracking hundreds of stocks all at the same time in order to identify opportunity in the market and place a good trade at the right time, and although that is an extreme too it certainly makes the inefficiencies of mobile trading more obvious.  Those simultaneous tools are not available on handheld devices.

The good news is that most traders realize this, and even those that don't realize it at first usually realize it before investing too much or losing too much.  It is a matter of fact and it's obvious to anyone that tries, but there is an alternative too, at least some think so...

The alternative is to subscribe to a service that sends alerts when proactive strategies fire trading signals.  In theory that sounds like a great option; it removes the need for all of the tools that other traders use, and empowers the efficiency of mobile devices, but investors that think this way are missing something too.

First, let's assume the alerts are made by email or text, and let's assume that the alerts come efficiently, without any connection delays due to lack of coverage or some internal service delays being experienced by the mobile carrier.  Let's also assume that the alerts are clear and concise.  These assumptions therefore assume that the alerts would be received in a timely manner without any confusion, but we all know that's not always true.

Even if it were, there are other hurdles: if you are in a meeting, driving, at the gym, at the doctor, riding your bicycle, in the shower, or otherwise engaged your ability to react in a timely manner is significantly diminished, and proactive strategies often require timely reactions.  Then, of course, you also need to connect to your brokerage account and place the trade.

All in, assuming an efficient connection and communication, the time difference between the proactive trade being fired and the execution of that trade by the mobile user could be 5-10 minutes.  That's a massive differential in timing, and it completely distorts the performance of proactive strategies.

For example, over the past ten minutes ProShares UltraShort QQQ (ETF) (NYSEARCA:QID), one of the ETFs often used in proactive strategies, increased by about 0.75%.  That suggests a mobile trader could have gotten a fill that was 0.75% worse than his peers who were using more efficient tools.  Extrapolate that over time, assume 1 trade like that per week, and you will see a performance differential of 39%, and that's massive!  It can add up fast.

The next logical thing for investors who insist on using mobile devices is that they simply won't try to follow strategies like that, and they should not, but the alternative draws them right back into the more traditional approach, which is not good either.   

Anyone can buy a stock if they get an email that says 'buy this stock,' but the difference between proactive and traditional strategies are the conditions upon which the stock should be bought and when that trade should be closed and that is what allows them to make money and control risk no matter where the market goes, something that the traditional approach does not do.

Here is a fix: the decision I made for my clients many years ago was to supply them with the trading signals many hours, and sometimes days, in advance.  This allows them to place conditional orders using the trading platform at their brokerage account and manage that conditional order from their mobile device.  That enables some of them and empowers their competitive advantage.

For example, we have a strategy (The Strategic Plan Strategy) that trades ProShares Ultra Dow30 (ETF) (NYSEARCA:DDM) and ProShares UltraShort Dow30 (ETF) (NYSEARCA:DXD) in conjunction with support and resistance levels in the DJIA.  The entry rule is a 25 point rule, and it says if the DJIA comes with 25 points of our support level buy DDM.  Our support level was 17142 recently, so the conditional order could have been placed as follows:

  • If the DJIA is >= 17142 and <= 17167 buy DDM
  • Send an email alert to my phone if this trade is filled.

On Wednesday, in the final few minutes of the trading session, that condition was satisfied, and DDM would have been bought for anyone who had that order in place, but if the relied upon alert was an email alert it would not have been attainable at all; there simply was not enough time left to the day.  Since then the trade is up about 5%.

The 'in advance' trading signals are the one way mobile traders can follow proactive strategies.

I love the flexibility of having a handheld, but I caution investors who are trying to engage proactive strategies from trying to do so on their mobile devices without significant advanced warning.  It will end up costing more than it's worth. 

One other alternative is to use a manager who will manage proactive strategies for you.  That removes the workload completely.  :-).