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automated trading

  #3 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

There are a few terms that are very similar. Right, automated trading refers to orders that are automatically generated and sent via a computer program. Systematic refers to trading a well-defined strategy-- perhaps one that could be automated but where the orders are sent manually. Quantitative refers to strategies that were developed using statistical and mathematical processes. Algorithmic trading refers to an algorithm or program. Most professional trading falls somewhere into those categories. However, I also can see the perspective that discretionary traders can bring to the table.

If you area an already profitable discretionary trader, any good/experienced programmer should be able to help you program what you already do within certain limits. I write a lot about the concept of grayboxes or methods that may allow discretionary traders a more structured process while still allowing them to utilize their existing skills. However, if you are not an already profitable discretionary trader with a strategy then I think it is unlikely that you would find someone who could/would develop for you a working system. Also, it is extremely difficult to take methods that discretionary traders use and to automate them in a way that is historically profitable. So, you're probably looking at again falls into the classification of a graybox where much of the edge is still going to come from your abilities.

So, let me just be clear: programmers develop systems for traders who already have clear concepts about what they want. This is probably only useful for discretionary traders with a lot of experience. On the other hand, system developers develop fully automated strategies from the ground up. The strategies can be run manually or via the computer. It is a huge amount of work. They will sometimes sell working strategies but often you will only be able to gain access via a signal subscription because the amount of work involved is significant and the edge is specific and proprietary.

As for algo vs discretionary trading, my own experience suggest to me that a good discretionary trader can profit from more opportunities. Also, I feel like a good discretionary trader is more likely to be trading based on the relevant or real factors that drive markets. Availability bias is a significant handicap for most system developers to overcome because most platforms make it much easier to produce price based only systems versus incorporating other sorts of data such as sentiment, news, etc. These are not insurmountable obstacles. However, systems can codify specific lines of market logic and execute them with greater consistency, allow better maximization of leverage, and probably as a result can do better over time. For me, again I favor grayboxes where a discretionary trader can influence the results. But, let me add most systematic strategies have much larger profit factors, trade too infrequently, and thus do not lend themselves to discretionary improvement.

My sense is that most successful retail algo traders tend to operate on the longer frequencies: either "swing day trading" or "swing trading". I won't say it is completely insurmountable to build higher frequency systems for the retail trader but certainly would require much specialized development.

As for tracking of systems where you can see the real results: there are a few vendors in the space Striker, C2, Worldcup Championships. These services focus on tracking actual results of primarily automated strategies, but sometimes discretionary traders. If I were going to look for a strategy, I would look to lease or buy one from a developer with a track record (disclaimer, I will be offering a Striker system sometime in the future and had top ranked C2 systems in the past). Something that might be worth nothing, it is not possible from a cost basis or infrastructure basis for most of these outfits to automate the highest frequency strategies. So, it is not indicative that such strategies are not being traded successfully via individual retail traders. For the most part, you are limited to market orders. On the other hand, in my discretionary trading I always try to get filled on limit on at least one side no matter what product I'm trading: not always possible but it is just something to keep in mind.

Last edited by tpredictor; November 17th, 2017 at 03:49 AM.
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