This is the third in a series of posts about how and why and how I started down the path of automated trading. Here’s the first, second, and third posts in the series (RSS). Our automated trading robot is available now. Trade your own strategy automatically with no coding required.

When I first started trading, I worried that I didn’t have enough market knowledge to come up with a strategy on my own. Since then I’ve traded a manual system that I’ve made some tweaks to to make it more consistent. There are some important changes that I made to it, but nothing that I would consider groundbreaking. I know people have differing opinions about this, but I think a lot of traders abandon strategies too quickly. There are so many variables that can be tweaked in a trading system. Of course, some are irrelevant to the strategy and modifying others just over-optimize your trading system. I don’t think there’s anything wrong with tweaking your system - perhaps a lot - if the changes make sense to the logic behind your overall strategy.

Everyone wants something that works right now and makes money every day without taking the time to develop a strategy. The problem with this approach is that if you trade a strategy profitably for a while and then you run into a drawdown (they are inevitable), you’ll give up on it precisely you haven’t done the work required to develop it. Drawdowns are valuable learning opportunities but you have to be willing to swallow your pride and be humble - if not then the market will gladly humble you forcibly.

There are plenty of strategies all around you that will work pretty well, at least as a starting point. Just think about what you see occur in the market every day. There is a tremendous amount of price movement everyday. Are some of those price movements tradeable? Probably so. Test them and see if they are. You’ll know pretty soon if something is worth more testing time. A lot of them won’t be, but some will be. A lot of it is counterintuitive as well - some ideas that you’re just sure will pan out won’t test well at all while others that don’t make any sense at all at first will test really well.

Once you start brainstorming for automated trading strategies, you’ll start gaining some momentum - those ideas will generate other ideas and strategies. A couple of my better automated strategies came from testing ideas that weren’t at all related to my initial concepts. One was purely accidental - I had a concept for a strategy and when I modeled it, it turned out that I modeled it incorrectly. I didn’t discover this until I had pretty thoroughly tested and refined the strategy. It turned out to be a pretty profitable system, but the event that I was trading wasn’t at all what I started out trying to capture.

I’ll write about how I’m doing testing in the next post.

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This is the second in a series of posts about how and why I started down the path of automated trading. Here’s the first and second posts in the series (RSS). Our automated trading robot is available in beta now.

Over the past couple years, I’ve been continuing to refine my manual trading system and automating as much of my manual trading routine as I can. As I have devised and implemented more rules, it suddenly dawned on me that I was really trying to trade like a computer. That is, by creating rules so that I realized that I was removing more and more of my discretion from my trading - I was trying to trade like a robot!

Aside from the obvious benefits of just having a well defined trading plan, there’s a hugely valuable reason for doing this. Imagine a very loosely defined trading plan (that is, a plan with a good deal of human discretion in it and “going with your gut”). After you trade for a while and you start reviewing your results.

This is where it gets really tricky because that “discretion” is such a huge variable that is extremely difficult to quantify. Not only that, but it often changes through different times and markets. So even tiniest bit of discretion in your trading system will be the biggest and most uncontrollable variable in your system.

So when you analyze your results (which is by far the best way to improve your system and make more money) that discretion is a moving target. You’ll need a larger sample of trading data to start making conclusions and improving your system and even then those conclusions will be less reliable.

You can see where this post is going. Trading an automated system completely removes the biggest and most unreliable variable from the equation! It allows you to trade like a scientist - using hard evidence to draw concrete conclusions.

Discretionary trading certainly has its place (it’s still my primary trading style), but there are huge benefits to automating your manual trades and taking that to the next step - completely automated trading.

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I’m “piloting” an additional automated strategy - a process that I’ll explain fully in a future post. Basically it means trading small until enough meaningful data has been collected to determine whether a system can be profitable in real world trading and not just simulated backtests.

This new strategy has backtested really well, so I’ve been trading it for a few days. It scored a knockout on Friday and made +30R in a single day! Even with small risk that’s a substantial amount.

My manual trading had a good day, too, for the first time in what seemed like quite a while. Friday basically saved what almost turned into a poor, breakeven month for May.

I hope everyone has a great week this week!

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This is the second in a series of posts about how and why I started down the path of automated trading. Here’s the first post in the series. If you’re interested in automated trading, check out our Automated Trading Robot which is available in beta now. It’s the best and easiest way to start automated trading - absolutely no coding required!

I thought about trying to trade additional manual systems, but I didn’t want the system to take any more of my time during the day.

For a long time when I thought about automation, I was always thinking about it in terms of automating my manual system which would be quite difficult to mechanize COMPLETELY (although not impossible). In fact, I’ve automated about as much of that system as I possibly can (there are a couple more aspects that I’ll be able to automate soon). But the fact remains that my manual system still requires me to manually submit trades.

I’m not sure why it didn’t dawn on me until somewhat recently, but I never considered adding additional strategies that were designed from the beginning to be automated strategies rather than retrofitting a manual strategy.

Around this time I was getting a handle on my manual trading drawdown and could see the light at the end of the tunnel. I knew at this point that I would start working towards at least a couple automated strategies.

There’s nothing like a drawdown to motivate you to improve and that’s exactly what it did. Also, since my manual trading is back on track and as good as its ever been, I’ve found that I need to put forth some effort to stay motivated to come up with automated strategies (since I don’t NEED it now). I also am realizing that this is the perfect time to brainstorm new strategies - when your trading is going well. There’s no pressure and there’s plenty of time to come up with something that works.

A few months ago I made some pretty radical changes to my manual trading. Instead of looking for trades throughout a large part of the trading day, I began concentrating on a much smaller portion of the day.

This worked really well because it is much less work for me during the day. It’s not that there weren’t setups to be found throughout the day, it was just that it was too much work for me to focus on the market for that long to try to find them. The performance metrics in StockTickr made it clear to me that although the trades were profitable, they weren’t profitable enough to justify all the work I was doing to find them.

This is another way that an automated strategy really shines - a computer can watch the market for setups all day long and it doesn’t get tired, hungry, lose concentration, and its eyes never start hurting.

Once the automated trading system finds a trade, it doesn’t make order entry errors, position sizing errors, and it always puts the stop in the right place. In fact, think about all the mistakes that human traders can (and do) make when trading. Almost all of them are eliminated by automation.

An automated trading system can also make several trades a second if it has to - something a human simply isn’t capable of doing manually.

For the next post in the series I’ll point out another huge benefit to automated trading. Hint: It’s got to do with the person sitting in front of your trading screen.

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I’ve had several folks ask about the automated trading strategy that I’m developing. Here’s a summary of where I am in the development of my automated trading. I won’t give specific details about the actual trading strategy because I think that would be a disservice to anyone reading this. What I will tell you is why I started down the path of automated trading, how I came up with a strategy, the steps I took to get it “tradeable,” and the software I use to do the actual trading.

Why I Started Considering Automated Trading

I’ve been day trading for coming up on two years now. During that time I learned a lot about my psychology, my trading edge, and my risk tolerance. Over time, I refined my strategy and became more and more consistent with my results. I’m still refining my strategy - this market is ever-changing and the strategy needs to evolve over time.

What worked for most months in 2007 stopped working for me in mid-November 2007. It took a couple months of simply breaking even and even a slight losing month to realize how I needed to change. My manual trading is back on track and I feel my trading is stronger as a result of that drawdown.

During that drawdown, I was very motivated to develop more profitable strategies to trade that could smooth out my returns. Hopefully these new strategies could take up the slack on days where I lost money in my manual trading. There’s nothing like a drawdown to bring out the creativity in you!

I also wanted to find something that traded more frequently. You might think that something more frequent than my manual system is just “too many trades,” but anytime you find a strategy with a positive expectancy you should try to trade it as much as possible without hurting the overall results of the system. Also, my manual trading system uses a relatively small amount of buying power in my account, so there’s plenty of room to trade at least a couple more systems.

In the next post I’ll talk about why I started down the path of automated trading and not an additional manual system, which I have considered as well.

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