StockTickr Trading Journal Blog » automated trading

Introducing Automation into your Manual Trading System

Dave — Fri, 30 Jan 2009 13:22:08 +0000

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:

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

5 More Reasons to Consider Automated Trading

Dave — Mon, 22 Dec 2008 13:21:16 +0000

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.

Different Automated Trading Systems – Which One Is Right For You?

Dave — Thu, 18 Dec 2008 12:23:32 +0000

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.

Google Tech Talk on History of Automated Trading

Dave — Wed, 17 Dec 2008 13:04:05 +0000

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.

Automated Versus Algorithmic Trading – Which is it?

Dave — Tue, 16 Dec 2008 14:04:25 +0000

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.

Why Backtests Can Fool You and What To Do About It

Dave — Wed, 10 Dec 2008 20:15:02 +0000

In this article I wrote a few months ago, I outlined 10 mistakes that new automated traders often make. Here are a couple points that I want to highlight again:

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.

and

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.

Once you understand how a backtester works, it’s easy to see why some strategies can be made to look great in a backtest, but you’d absolutely never want to actually trade them.

Using a Stop of $0.01 Will Never Work

One of the easiest ways to make strategies look good in a backtest is to use ridiculously tight stops. Here are the results of a backtest using a stop of $0.01.

To summarize, this backtest showed this strategy taking 112 trades with a win rate of just 8.9% but get this – it made 1400R for an expectancy of 12.51. Wow – an expectancy of over 12.

You would NEVER want to actually trade this strategy even when it backtests with such an astronomical expectancy. So the backtest showed serious profitability for a strategy that would lose serious money. Why?

The problem is that any backtest is working off historical data. Regardless of the interval the backtester is using for the test, the backtester software always waits until the next bar after the entry to determine if any exits occur.

Why doesn’t it use the entry bar to test for an exit? Well, that is impossible. Think about it: let’s say you have a signal that gets you in stock XYZ during a bar that has an open of 49.70, a high of 50.00 a low of 49.50, and a close of 49.95. Let’s say the backtester used an “entry” price of 49.80 and you were long and had a stop of $0.20 which would put your stop at 49.60.

But, the low of the bar was 49.50 – should the backtester stop you out or not? There’s no way for the software to know what the price action was during that bar without zooming in and using a smaller time interval for the backtest. No matter how small the interval you’ll always have this problem, so the software always waits until the next bar to determine if any exits are hit.

This is why I think it’s so important for automated traders to understand how a backtest works – if you don’t you can easily get into a situation where you’ve gotten your hopes up for a strategy that is almost guaranteed to lose money.

Of course, if you follow the guidelines we give you for automated trading you’ll learn very quickly how to recognize these gotchas before you put any money at risk – think of it as learning the lesson without paying the “tuition”.

Redundancy in your Network Connection for Trading

Dave — Tue, 09 Dec 2008 20:44:42 +0000

As I saw my internet connection go sour right at the open today (wasn’t completely down but VERY VERY slow), all my automated trades didn’t see the light of day because of the delay.

This got me thinking again about adding a DSL line to the house for redundancy in the event this happens again. As I’m sure you’re aware, the cost of not trading can be quite substantial, so it makes economic sense to put some thought into a backup plan. There are somewhat reasonably price routers
out there that are able to load balance and provide automatic redundancy between two internet connections, but I’m not sure how reliable they are judging from some of the review comments on Amazon.

Any traders out there have a set up like this? How is it working? Are you using a fancy load balancing router or do you manually switch over in the event of an outage?

Survey: Is it “Automated”, “Algorithmic”, or “Systems” Trading?

Dave — Mon, 08 Dec 2008 13:48:24 +0000

I’m interested to hear what you think about this controversy. When referring to a framework where a computer initiates and manages trades without human intervention – what phrase do you think best describes that concept?

Automated Trading
Algorithmic Trading
Systems Trading
Program Trading (added thanks to Drew’s comment below)

What phrase would you say most people use? I’ve got my own thoughts on the subject that I’ll write up in a future post, but first I’d like to get your thoughts?

Which one is best and why? And which phrase do you think is most popular?

Reader: Automated Trading – Can It Be That Easy?

Dave — Fri, 05 Dec 2008 13:17:09 +0000

I received this question via email from a reader asking about automated trading.

Hi, I have a friend that just recently got introduced into systems trading (automated trading) through another friend that has shown consistent returns for the past 1-2 years. I’m sure systems trading works as its basically a robot that is replacing a person trading and by following a script that detects indicators on when to buy and sell.

From what he told me he has been making 20-50% per month in today’s volatile market. but in normal market conditions it makes about 10% a month. He’s using Tradestation and the guy made a automated script to trade the market. I would imagine there would be tons of these kinds of scripts that people has made just to do this kind of thing.

I asked a lot of questions as this was quite new to me. I understand what the system is doing, but from the way I see it, is it really that easy to make money through systems trading? And what if one of those days that the market goes in a way the system fails and you lose it all. just like how the martingale system works.

They tested their system on historic market data to make sure their system is valid and told me for them to lose it all it would have to do some kind of drastic move. what is your opinion on this?

Let me start off by saying that any good trading takes practice, skill, and hard work. That includes automated trading (or systems trading as the reader calls it). So, regardless of what type of trading you do, it will probably be more work than you think to do it well.

That said, I really like automated trading because it allows you to avoid a lot of the mistakes that manual traders make. Ninety percent (or some ridiculously high number) of traders fail – many of them because they make common mistakes that humans make. You’ve probably heard me say before that humans are hard wired to do the opposite of what it takes to trade profitably. For example, letting losers run instead of your winners.

Automated trading lets many traders do what is just not possible to do on their own – create and follow a trading system. There are a lot of traders out there who simply can’t follow their trading system because of their psychology and emotions.

Instead of relying on your emotions and gut, you can use automated trading to take a methodical and statistical approach to the markets – you can quantify your trading edge by backtesting and “pilot trading” (trading very small amounts to see how your system works in actual market conditions without putting too much at risk).

So, you can trade profitably without worrying about your account going to zero. If I was a better salesman, I’d say it’s a breeze and easy money. But I’d rather have clients that have realistic expectations about the markets.

Another Video of the Trading Robot

Dave — Tue, 02 Dec 2008 13:42:35 +0000

Here’s another video (previous videos here) of one of the trading robots for use with Trade-Ideas. In this one, Jamie uses a few arb strategies and pulls 8.5 points out of the market in about 15 minutes. Not bad for just a few minutes of trading!

This underscores one of the many reasons to use automation in trading – there’s no way that any human could take these trades manually. Automation opens up an entire universe of possible trading strategies that just aren’t possible to trade manually.