Automated Trading Strategies| In a previous blog post I wrote about emotional trading, I mentioned how I had met a number of traders that had a hard time removing their emotions from their trades. I mentioned that people are just wired in a certain way. Given a number of possible outcomes, we will usually pick the same outcome. So I decided to do a small experiment within my emotional blog post to see if this is true. I wanted to see if I could get a somewhat predictable outcome from people. I wanted to see if an unfinished blog post that raised a question and gave a partial answer would get a response.
I sure got a response, a full 300 percent increase in complaints. The complaints came in furiously! So if the complains came in a predictable way, what happens if you have a trading strategy that hasn’t shown any buy opportunities and everyone around you is yelling buy? How would you act if you have lost money for four months straight. Would you still pull the trigger in the fifth month?
It’s hard to overcome the hardcoded emotions that we carry around. One way to help people get over the hardcoded emotions and better improve trading results is to automate your trading strategy.
Automating your trading system, will help decrease the emotions that might hinder your trading. I have worked on myself for a number of years and have gotten a lot better with emotional discipline, but I still automate my trading.
Automated trading systems allow traders to establish a set of rules on whether to enter a trade or exit a trade. Automated trading requires that these rules be coded into a computer. When I started to learn about automated trading I thought I had to become the architect of the matrix to learn how to translate my ideas into computer code. There are two ways you can go with automated trading, you can learn how to code it yourself or hire someone to code it for you.
I chose to learn it, it will take some time for you to learn how to code your ideas, but once you get the hang of it, it becomes easier. I learned by asking people who knew a lot more than me about it on forums. Side note – I have always found that traders and investors are extremely generous people. They are always willing to help people that are willing to learn.
There are a number of brokers that give you the ability to code your ideas into their trading platform. In the past not a lot of them offered this feature, but now I believe nearly every online broker has some sort of coding platform that is meshed into their trading platform.
Automated trading strategies can be simple or extremely complex. A simple automated trading system could be based on moving averages-an indicator frequently used in technical analysis showing the average value of a security’s price over a set period. An automated trading strategy could be as simple as a 50 day moving average crossing over a 100 day moving average giving you a buy signal and when the 50 day moving average goes under the 100 day moving average a sell signal would be generated. The complex strategies are where you might need to hire someone with extensive programming skills to code your ideas for you.
The pros of an automated trading strategy outweigh the cons.
Automated trading strategies help take the emotions out of your trading. They help you reduce the fear of trading. They keep those cortisol levels in check! As I pointed out before in the post that is linked to this, once traders start losing money they start to develop a fear of trading.
In order to become a successful trader you need rules. Automated strategies make sure we follow those rules. It gives us discipline! Discipline lets us stay on course even if we are going through some severe drawdowns-A drawdown is usually quoted as the percentage between the peak and the trough.
The ability to backtest a trading strategy to me, is a huge plus. If we wanted to know how the trading strategy did in bull markets, bear markets, or the dreaded sideways markets we have quantified proof of how it would have done in the past in each of those markets.
If you decide to learn how to code an automated trading strategy you’ll start to notice that all computer programming languages are extremely similar in nature.
Once the trading strategy has been coded, it doesn’t mean that it’s all over. There are number of things that can still spoil the positives of an automated trading system.
v You still need to have the discipline not to override the automated trading system. In trading there exist drawdowns, and some drawdowns can last a long time, maybe a year or even two. You might have strong inclinations to override the system during drawdowns.
v The possibilities of curve fitting exist when you automate your trades. This is when you massage the parameters in your automated trading strategy so that you get a desired result. I would implore anyone who has automated their strategy to run a stress test. A stress test would see how your system would do with a set of randomly generated prices. Here is a link to a random number generator for stock prices. http://25yearsofprogramming.com/blog/20070412c-montecarlostockprices.htm It is a pretty straight forward process to enter the parameters. When it is finished, copy and paste the data where it needs to go.
If those traders that I had met two weeks ago had an automated trading system I probably wouldn’t have written anything about it. After seeing all the positive elements that an automated trading system brings, how can it not decrease the anxiety and hard coded emotions that we experience when we trade! |Automated Trading Strategies