I’d bet that if you asked every trader if their trading was “streaky” – the vast majority would say yes. Every trader goes through dry spells and periods of nice profits. But if your trading is TRULY streaky you would be able to improve your system by modifying it slightly to skip trades or at least modify your commitment to certain trades (reduce position size).

Let’s say you have profitable and losing trades that tend to occur in streaks. If you could determine that the streakiness was statistically significant, then during a string of losing trades you could back off your position size or pass on trades until you see one that would have been profitable. Once you encounter a profitable skipped trade you could start trading again.

If the trades in your system are negatively correlated (that is, losing trades tend to be followed by winning trades and vice versa) you could potentially set up a rule to do the opposite.

I’ve recently added a streakiness report in StockTickr that will calculate this correlation statistic for you based on anything you choose to filter on (tag, date range, dozens of other filters).

It turns out that there are fewer systems that are streaky enough to profit from than you might imagine. At least in my experience, there were only a couple out of the dozen or so systems that I’ve traded that showed any promise at all for this streakiness.

I’d be interested to hear if anyone out there has implemented a rule such as this to try to improve their trading system. How did it turn out?

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with TraderAM. TraderAM is an independant day trader who has an interesting style of trading and posts all his trades on his blog. Feel free to ask him questions in the comments section below.

Read on for a great interview and learn more about how Amarjit trades, the types of setups he’s looking for, and how he got started trading.

Read the rest of this entry »

When a lot of traders think of automated trading, they envision going from completely manual trading to completely automated trading. They mistakenly view this as a loss of control – they are used to being in complete control of their trading making every decision. It’s unsettling for a lot of people to lose this control and offload more work to their computer.

What most don’t realize is that automated trading IS complete control. The factors and inputs are completely designed and controlled by the trader and the computer doesn’t stray from the strategy it’s been assigned. This is just the opposite of lack of control.

A good way to think about switching to automated trading is to introduce automation into your manual trading system. Think of it as a continuum like in the image above. It’s not all or nothing – you can slowly integrate automation into your manual trading system so that over time you’ll do less trading grunt work and become more and more comfortable with automated trading as you move to the right on the continuum.

Here are some ways to start offloading manual work from your trading system:

1. Use a product like Trade-Ideas to systematically gather stocks that fit your trading system.
2. Explore using multiple monitors to save you time and effort and miss fewer trades.
3. Use tools to automatically calculate your position size, saving time and preventing mistakes.
4. Streamline your trading routine to cut the fat and become a more efficient trader.
5. Use the StockTickr Trading Bot to get you into trades and then you can manually manage all aspects of the exit.
6. Use the StockTickr Trading Bot to get you into trades with a time stop and then optionally manage an exit before the time stop expires.

There are lots of ways to become familiar with automation without going all in. Are there other ways you can think of to move towards automation on the continuum?

OK, I don’t think anyone on the planet needs a 24 monitor setup like the one above, but it makes a lot of sense to trade with more than one monitor. I trade with the 4 monitor setup pictured below and I would never go back. It’s not cheap, but it was a simple decision to me once I thought about it. (See the end of the post for links to the specific components I bought).

First off, there are a lot of benefits to having multiple monitors. Some are pretty obvious but others I didn’t realize until I used my setup for a while.

1. Much more viewable area to have more windows open

Flipping through open windows is extremely time consuming and inefficient. You don’t realize just how much time you spend flipping through windows until you don’t have to. Let’s say you look at charts in multiple timeframes – the daily, hourly, and 5 minute charts. If there’s not room on your screen to have all three visible at the same time you’re going to spend a lot of time and energy changing between windows to take in the information on each chart. Since the data is changing constantly, you’ll be doing this routine several times just in the course of a few minutes. If you have enough desktop space to have all the charts visible on your screen at once you’ll be at a huge advantage.

2. You’ll miss fewer trades

If you’re not spending time flipping windows, you’ll have more time and more desktop area to find more setups, so you’ll miss fewer trades. Of course, if you have a tendency to over trade you’ll need to be very careful and keep that in check.

3. You’ll be far more productive doing your non-trading tasks

I really underestimated the affect multiple monitors would have on my non-trading tasks. It’s huge! Imagine doing some programming or intense writing and then having to refer to some documentation in a browser window. With one monitor, there’s really just not enough room to position both windows quickly and efficiently on one screen. With multiple monitors there’s plenty of room to place the windows side by side so they’re both visible. I can’t emphasize enough how much more efficient this is.

Making a “Business Case” to Your Wallet (or Spouse!)

Multiple monitors are not cheap. A reliable, supported video card that supports 4 monitors is at least $500, plus at least $180 or so per monitor and you’re closing in on $1400-$1500, which is more than even the computer itself in many cases. Plus you’ll need a mounting setup.

Does it make sense for you to spend that much for a multi-monitor setup for trading? It depends on your trading and how well you know your trading system and daily routine.

The questions I asked myself were:

• Do I believe that I’d be able to find enough additional trades using the new monitors to recoup the cost?
• Do you find yourself missing out on setups that have made your watchlist but you miss them because they’re hidden behind another window or minimized?
• How regularly do you miss trades like this?
• How many of these trades would it take to recover the cost of the monitors?

As you can see, the answers to some of these questions depend a lot on the frequency that you’re trading, the level of profit you make from your trades, how much size you use on your trades, and the nature of your trading system.

For me, it was a pretty easy decision. I knew my system well enough to realize that I was missing trades on a somewhat regular basis and it would just take a couple of good winning trades to cover the cost. Looking back on my results I figured the investment would easily pay for itself within a month. While at first the upgrade seemed a little decadent considering my normally cheap, bare-bones personality, when I thought about it in these terms I realized that there was really no argument at all and I pulled the trigger.

I bought these several months ago, but here are some equivalent components that I would get if I was making the purchase today – note that, of course, by the time you’re reading this these prices have probably changed:

• 4 X BenQ FP202W V3 20-inch Widescreen LCD Monitor (Black)
  @ $173.50
• Matrox M9140 – Graphics adapter – M9140 – PCI Express x16 low profile – 512 MB DDR2 – DVI
  @ $511.99
• DS100 Quad-monitor Desk Stand
  @ $291.93

Any suggestions on the setup? Would you make any changes?

Well, it’s that time of year. Everyone is reflecting back on 2008 and making trading plans for 2009. This trading goal post from Jack from rmultiples got me thinking again about some good advice on goal setting I heard from my track coach in college.

Instead of coming up with a single, succeed-or-fail goal it’s usually much better to come up with a range of goals. I come up with a conservative, reasonable, and radical number for whatever goals I’m setting.

This accomplishes a couple things – it gets you away from a feeling of failure if you fall short of your goal – it gives you some wiggle room. Also, say you reach your goal earlier in the year – if you have a single goal then you may feel subconsciously like your job is done. If you’ve got a range of goals then you can continue to take your goal seriously.

The more subtle thing this technique does is forces you to think more deeply about what your trying to accomplish and what is reasonable to expect from yourself and your situation. Everybody likes to shoot for the stars and come up with a lofty goal, but it actually takes a lot more thought and self-examination to come up with a conservative goal – something closer to the failure mark and a moderate goal – a number that’s acceptable.

Are there any suggestions you have for trading goal setting as we turn our calendars?

This post was contributed by Kelly Kilpatrick, who writes on the subject of currency trading. She invites your feedback at kellykilpatrick24 at gmail dot com.

Each day, more and more traders are leaning toward automated trading. Far more precise and less prone to human error, automated trading truly does seem to be the way of the future. Browse through the following list and see some more reasons why you may want to consider automating your trading and free yourself up for something new.

You Set the Parameters

You may be hesitant about leaving your financial future in the hands of a computer, and that is completely understandable. However, you are the one that ultimately sets the parameters for just how far you are willing to go on any given day. Of course, the term automated trading sounds like you won’t have to do anything, but this is far from true – you ultimately set yourself up for success or failure with automated trading, just like manual trading.

Attend to Learning and Research New Investments

Once you establish your parameters for your automated trading, you are free now to pursue more investment options and continue learning about new strategies and possibilities. This is valuable, indeed, and helps lay the foundation for more earning potential in the future as you continue to develop your skills while the program does the dirty work.

Snap Analysis

Automated trading programs are able to analyze copious amounts of data in a very brief amount of time. This being said, the program can make the best analysis far faster than you can and will make a decision based on the guidelines you have put in place. This can be very beneficial in crunch time and could ultimately save you valuable time and money in the process.

Emotional Detachment

The program itself will not be emotionally attached to the investments or the data. This can be a great thing when you are having a tough time making a rational decision. The fact that the program can crunch more data and use said data to make an informed decision will only serve to help you and your needs down the road.

Results Speak for Themselves

If you look through some of the previous posts on this blog, you will begin to see that this kind of trading has been very good to us indeed. Manual trading can be tough; sometimes we zig when we should have zagged, but automated trading seems to take this phenomenon down to a minor point.

Here’s another great post by Joey, the Downtowntrader. Joey was one of the earliest users of the trading robot. He’s trading the right way – he’s tested for several weeks in demo mode and then graduated to live trading, then trading with size.

He talks about his journey and goes into detail describing what I believe is a recipe for long term trading success. Here are some of the questions he answers:

• Are the results real?
• Does it ever blow up and have a really bad day?
• Is your automated system profitable too?
• How long did it take to develop your system?
• Could you just use trade-ideas and trade the alerts manually?
• Do you intervene with your system?
• Can you use the canned alerts that come with Trade-Ideas?

For new automated traders, it’s always interesting to hear what their mindset is. Specifically, it is interesting to know the type of system they plan on trading – not the specific details of their strategy, but from a very high level.

If you follow this blog you probably already realize that there are at least hundreds if not thousands of profitable systems out there. But how do you find one that YOU can use to make money. If you’ve taken the step into automated trading, you have lots of options.

Here’s one way I like to separate systems into categories for the purposes of automated trading – I think this provides a nice blueprint for how to start thinking about automated trading.

1. Automate a Manual System You Already Trade

The most logical step for a lot of traders is to automate a manual system that they’re already trading. I think this is a great place for most new automated traders to start. It allows you to take small steps into automated trading in an environment that they’re already familiar with – their manual trading system.

By doing the prep work to automate their manual system, the trader has an excellent frame of reference to compare their automated results to since they already have extensive experience manually trading the system. Once they’ve converted this system over to full automation, it provides a good foundation to start delving into other strategies.

The other advantage to this approach is that when you start modeling your strategy and backtesting it, you’ll likely learn a lot more about your manual trading by doing so and your results will be more consistent.

2. Trade a Strategy That Looks For Infrequent Setups

There are a lot of profitable manual systems out there that trade really infrequently. While it’s possible for you to stare at your computer screen all day waiting for the setups to materialize, it’s much more efficient for you to automate this type of system. So while it’s not impossible to manually trade these types of systems, automated trading can give you a clear edge since your automated trading software doesn’t need to take a rest or eat lunch.

I’ve traded systems like this before and inevitably a very frustrating thing happens – you wait for hours looking for the setup and then you get distracted for just a brief period and (of course) that’s the exact time that the signal occurs and you miss it and you torture yourself with the decision to chase it or not.

Automating this type of trading system is usually a big time saver and saves you a lot of wasted effort.

3. Trade a Strategy That’s Impossible to Manually Trade

This class of strategies is probably the biggest reason to start automated trading. There’s a whole universe of strategies out there that are simply impossible to trade manually, but that you can unlock by using automated trading software. For example, let’s say you want to enter 50 orders in the first minute of the trading day all with specific entry and exit criteria. You don’t need me to explain why this is impossible for a human to trade. With software, trading this type of strategy is now possible.

Another reason to trade this type of strategy is that there are probably a much larger pool of traders trading the first two types of strategies. However, because this type of trading can’t be done manually, you’ve excluded the vast majority of traders from your “pool of trading competition”. That is, you’ll essentially be competing against fewer traders.

Max Dama alerted me to a very good talk by David Leinweber who has been involved with automated trading and the markets for a long time. It’s about an hour long and the first 40 minutes or so are excellent.

In one of his slides he shows this image which I believe sums up the evolution of the trading industry as much as anything.

What I didn’t like about the talk was towards the end of his presentation. David culminates his talk with a discussion of an obviously well chosen example of how you could scour news stories to piece together a case for buying a stock before the market realized the implications of the news and therefore you’d be ahead of a huge surge in the stock.

I think most folks (especially analytical people) would be better off trading technicals than trying to guess how the market will react to a news story. That said, it’s well worth an hour of your time to watch his presentation.

David blogs about his new book, Nerds on Wall Street: Math, Machines and Wired Markets.

This is a follow up to the informal survey I posted a few days ago about the best name for automated trading. I’ve heard it referred to a number of different ways and I was wondering what most people refer to it as.

My Thoughts

I have a real problem with referring to automated trading as “systems trading”. It seems like a lot of people call it that, but I think it implies that any trader that isn’t traded automatically can’t possibly be actually trading a system. That’s obviously not the case.

I couldn’t quite figure out why I didn’t like “program trading”, but I like Jason’s reply that it just seems like 80’s terminology for some reason.

That leaves algorithmic versus automated trading. I like the phrase automated trading because I think it implies that it can be applied to essentially any trading system. Algorithmic trading on the other hand seems to imply a specific style of trading – one that involves intense and complex computations. Oooh – scary and complicated!

What Do People Search For?

Max Dama sort of stole my thunder with his post on the subject, but here’s what Google says about automated versus algorithmic trading in terms of what people search for. It turns out that automated trading is searched for about 30% more than algorithmic trading – which seems to be about right.

I looked in the Google Adwords tool to compare automated trading and algorithmic trading and it indicates that advertising competition for “automated trading” is significantly higher than it is for “algorithmic trading”. This means that a lot more advertising is targeted at automated rather than algorithmic trading.

So no matter what your personal opinion on the subject, it’s hard to argue with where most advertising dollars go.