10 Ways New Automated Traders Get Tripped Up

August 21st, 2008

I’ve seen some new automated traders start using the bot and there are some pretty common mistakes that I see people make over and over. When it comes down to it, they are pretty much the same mistakes that you see manual traders making, but there are a few mistakes that are specific to automated trading.

Here’s the list not in order of importance:

  1. Trading Too Large, Too Soon – It’s tempting to start trading with size soon, especially when you look at the results of a backtest for a decent strategy. As with any new trading strategy, but especially with automated trading, you need to trade really small in the beginning – so small that 10 or more losing trades (with slippage!) in a row will do no emotional harm to you (I’m not kidding here).
  2. Trading Strategies that Trade Too Frequently – There are strategies out there that you can find pretty easily that trade over 100 times a day that appear to be really profitable in a backtest – certainly when you look at the number of dollars per day. Besides the fact that you probably don’t have the account size to trade this system profitably, taking too many trades will make it much harder to go back and examine the trades. If anything, you should start off trading too infrequently.
  3. Doing No “Forward Testing” – For each strategy that you find that you want to trade, don’t jump right in and do a cannonball in the deep end off the high dive – dip your big toe in the water a few times and see how the water is. The water might be full of piranha. OK, this analogy is over the top but you get the point. I call this process “pilot trading” – take some very small trades and see how they matchup with the backtest.
  4. Blaming the Money You Lost on the Backtest – This is common. While I do believe the Odds Maker is the best backtester out there, it is still, well, a backtester. If you’re trading results don’t measure up to what the backtest results look like, then figure out why (there are a variety of reasons why this happens). Trust me, it’s not the backtester’s fault.
  5. Not Comparing Actual Results with Backtested Results – Everyone is lazy, me included. If you lost money on some trades, the last thing you’re probably motivated to do is go back and examine each one – but this is absolutely critical for your automated trading success. StockTickr now includes an automatic comparison tool that shows a trade by trade comparison of live trade versus backtest result. This will save you a lot of time and show you why there are differences between your actual results and your backtest results.
  6. Using Market Orders for Entry without Reason – I haven’t found a strategy yet where I’ve concluded that market orders are the best way to enter your positions. I’m sure they exist, but I haven’t found one that I’m comfortable using market orders. Trust me – start off using limit orders and if, over time, your analysis shows that you’re missing a lot of good trades then adjust your limit order so that you’ll capture more of those.
  7. Ignoring Slippage and Commissions – These are HUGE factors in automated trading. There are ways to keep both at bay, but there are strategies out there where the slippage will be too much to overcome. StockTickr automatically tracks slippage for you so it shouldn’t be too difficult to determine this.
  8. Not Spending Time Learning Why Some Unprofitable Strategies Backtest so Well – The quicker you learn this the better off you’ll be. Once you understand why some unprofitable strategies can be made to look awesome in a backtester, you’ll learn how to recognize if the strategies you model are showing backtest success because of these reasons and you’ll be able to avoid them.
  9. Manually Overriding Your Automated System – You can probably guess how I feel about this (see this post). There are situations where it makes sense to do this, but introducing your discretion makes testing and improving your performance more difficult.
  10. Not Understanding that It’s a Marathon Not a Sprint – Automated trading is not, well, automatic. It takes time and hard work and money to start off. Make sure you leave yourself plenty of rope, because it will take some time and “tuition” to figure out what works. Many times small adjustments can make a huge difference in a strategy’s performance.
  11. (Bonus) Using Stops that are Too Tight – I see this time and time again in every type of trading and it’s no different in automated trading. In fact, the effects of using stops that are too tight are magnified. You’ll have a better chance at success if you look for the loosest stops and work down if your live trade analysis concludes that they’re too loose.

As you can see, successful automated trading is still hard work just like any other kind of trading. However, the obvious benefits are simply too good for me to ignore.

Update: My buddy Eyal had another one which I kinda touched on but should have devoted more to. New (automated) traders expect too much – keep your expectations on the low side of reasonable. Also, I always encourage traders to have a range of goals from conservative to radical. If you aim for the moon and you don’t meet the mark, then you’re just setting yourself up for disappointment and frustration.


  1. Keith Shepard Said,

    August 21, 2008 @ 1:37 pm

    Excellent post. Most of your points hit home (#4, #6 & #7 especially), but your first point, “Trading Too Large, Too Soon” is absolutely spot on. Traders of all levels should burn that point into their brain when designing new systems.

    I didn’t do that a few times until I learned. Now I keep it small and I keep track of my trades. I stalk my systems for at least a year before I consider live trading “full” positions.

    Sure, I don’t get rich quick and some days I dream of “how much that winner would have been if I had been in full”, but the converse, “how much that looser would have cost me had I been in full” keeps me safe and coming back to battle again tomorrow.

  2. Dave Said,

    August 21, 2008 @ 5:07 pm

    @Keith – great points and it sounds like you’ve got a solid plan for long term trading success.

    Thanks for the comments!

  3. Why Backtests Can Fool You and What To Do About It - StockTickr Blog Said,

    December 10, 2008 @ 12:15 pm

    […] 10 Ways New Automated Traders Get Tripped Up […]

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