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The allure of automated trading
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The allure of automated trading

  #31 (permalink)
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worldwary View Post
In the end, I don't feel that this testing has been particularly helpful to my trading. When real money is on the line, I simply don't trust the results of the testing. I've observed that market conditions change much more frequently than I thought when I first started trading, with has created this huge nagging cloud of doubt every time I'm trading a tested system that starts to run into a drawdown phase. I can't get past the eternal question for mechnical traders: Is this just a routine drawdown or the beginning of the end? Psychological weakness maybe, but I've eventually come to the conclusion that I couldn't trade a mechanical system even if I wanted to.

Well thanks for answering. You're the only one so far.

It sounds like because your testing was manual, you couldn't really cover enough market conditions to be confident. Can we assume that your backtested trades were very similar to what you could have accomplished live?

I know exactly what you mean about the drawdown dilemma. My systems have small drawdowns for that very reason, so that I'd be able to spot quickly if it wasn't performing as expected. The thing is though, you can identify what sort of market conditions you've tested, and after you've done a lot of testing, you develop an intuitive (ironically) feel for whether your system and tweaks are curve fitting. So, if you've covered all general market conditions, eliminated curive fitting and have mentally OK drawdown sizes, then you really have to trust it and give it a go right?

I'm agree with RM99. The psychology and undisciplined way of manual trading is what fills me with worry.

And how would I ever determine whether I was trading well or just lucky? I can't leave that to non-scientific processes.

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  #32 (permalink)
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Xeno View Post
Well thanks for answering.

No problem.


Xeno View Post
It sounds like because your testing was manual, you couldn't really cover enough market conditions to be confident. Can we assume that your backtested trades were very similar to what you could have accomplished live?

It's possible that I could develop confidence in a backtest if it was thorough enough. My own tests have varied from just "poking around" with an idea for 100 trades or so just to see if a given tactic might work, to more extensive computer-assisted backtests looking back over years of data. You're correct that I probably haven't gone far enough down this road to develop as much confidence as I would ultimately need.


Xeno View Post
I know exactly what you mean about the drawdown dilemma. My systems have small drawdowns for that very reason, so that I'd be able to spot quickly if it wasn't performing as expected. The thing is though, you can identify what sort of market conditions you've tested, and after you've done a lot of testing, you develop an intuitive (ironically) feel for whether your system and tweaks are curve fitting. So, if you've covered all general market conditions, eliminated curive fitting and have mentally OK drawdown sizes, then you really have to trust it and give it a go right?

Yes, by all means, if you have confidence that your testing shows you've got a system that works, then it would certainly make sense to trade it. My mental block in this area is more emotional than rational I think. Someone with stronger nerves could probably have made a lot of money trading some of the systems I've dumped by the wayside as too risky.


Xeno View Post
I'm agree with RM99. The psychology and undisciplined way of manual trading is what fills me with worry. And how would I ever determine whether I was trading well or just lucky? I can't leave that to non-scientific processes.

I know, I've felt that way too myself at times. I've cycled back and forth from the mechnical camp to the discretionary camp a few times over the years. I've found that there's no certainty on either side; you trade one form of uncertainty for another.

Discretionary trading is prone to human error, which if left unmanaged could lead a trader to keep taking setups that "feel" like high probability trades due to some quirk of human cognition but really aren't. Mechanical trading is prone to curve fitting and market evolution risks. In either case, real-time trading results may be much worse than expected based on your trading history or your backtest. Pick your poison I guess.

The "proof" at the end of the day is whether your trading account grows or shrinks.

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  #33 (permalink)
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I think I often ask when people talk with me about trying to achieve systematic trading, I often ask what their skill set. I would suggest that you donít have a electrician doing the plumbing in your house do you? Why would someone who has some experience of manual trading be necessary any good at development systematic / algorithmic trading strategies? Of course, there will be exceptions to that generalisation?

I asked Mike a question a while ago on this thread that was never answered


drolles View Post
Why are you so anti-automated trading?

I think Iíve found the answer to the question in his original post:


Big Mike View Post
Take it from someone who spent over a year, 8-12 hours a day, working on incredibly complex strategies.

He is someone who has tried and failed to develop automated trading strategies. I wonder what his skill set is? And Iím in no way being critical.

There is a group of guys I often have this conversation with. One of the guys has done the same thing (tried to develop automated systems), he often say ďIíve never been able to develop anything that workedĒ, thereby implying that no-one can. While of got a great deal of respect for that guy, he is no statistician, quant, developer nor computer scientist. I would suggest that he has the wrong skill set to be trying to do this. Not without the appropriate help anyway.

Why isnít possible that the allure of automated trading trying to leverage a skill set that should mean automated trading was something that you might be good at?

Kind regards,

drolles

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  #34 (permalink)
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Talking of algo trading Ė the father of the practice makes a great point here: Mathematics, Common Sense, and Good Luck: My Life and Careers | MIT World

Letting emotion into trading models at about minute 31.

Kind regards,

drolles

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