Trading robots are attractive when they perform trading at fast tempo (e.g. trades that last a few minutes, or a few hours, or even days but the entry and exit time is monitored over say ticks, minutes or 15 minutes etc). You do not have to sit for hours in front of the monitor.
So the question is really: For a given trader, is it better that he programs a robot with his system to do an intraday trading that you check once per day, or is it better to do manual trading at daily bars, spending only a few minutes per day? Theoretically if the robots could do exactly what the manual trading would do, the robot would be preferred. But this is never the case! Robots, depend on the state of the art of software engineering, Broker's platforms, and the web technology, for the present do much worse that what manual trading can do. Have you notice in the sites when you upload or download data, a distorted words that is asked to recognise before you proceed? They want to be sure that you are real person in front of the monitor, and not a robot. So while for human visual pattern recognition of such distorted words is easy to figure out, for software robots is very hard or impossible. The same is with trading robots. A pattern that is easy to recognise visually as distortion of a well known trading pattern to you, may be impossible for the robot to recognize.
Even when automated software e.g. drives a car (something important that a human life depends) there is a big data base that is filled with the education of the software with patterns that the automated system may encounter, after decades of education and manual intervention of what to do with the particular pattern. It is difficult endeavor , for hundreds of people , big data bases and many many years. No data bases are possible or easy to use with the standard platforms of automated trading like tradestation, MT4 etc , neither are available resources like hundreds of people working for many many years. Therefore we should accept that the standard technology of automated trading permits only simple tasks, and cannot replace for the moment the capabilities of manual trading.
Therefore even if there is hidden "Future Teller" in you, who would mocks all of your attempts to code an automated trading fast , in intra-day rhythm, that will be stable for many years and sufficient spectacular in profits, this does not mean that there is not a reliable scientific statistical application of a semi-automated system of transactions , that could have such spectacular results, neither that because it has to relay on subjective discretion , this is of inaccessible manual difficulty. I would compare it to good and nice musical improvisation on a musical instrument! It is not so easy as car driving, and maybe not so fitting to the psychological potency of everybody, but still many peaple can learn can do it.
Even when automated software e.g. drives a car (something important that a human life depends) there is a big data base that is filled with the education of the software with patterns that the automated system may encounter, after decades of education and manual intervention of what to do with the particular pattern. It is difficult endeavor , for hundreds of people , big data bases and many many years. No data bases are possible or easy to use with the standard platforms of automated trading like tradestation, MT4 etc , neither are available resources like hundreds of people working for many many years. Therefore we should accept that the standard technology of automated trading permits only simple tasks, and cannot replace for the moment the capabilities of manual trading.
Therefore even if there is hidden "Future Teller" in you, who would mocks all of your attempts to code an automated trading fast , in intra-day rhythm, that will be stable for many years and sufficient spectacular in profits, this does not mean that there is not a reliable scientific statistical application of a semi-automated system of transactions , that could have such spectacular results, neither that because it has to relay on subjective discretion , this is of inaccessible manual difficulty. I would compare it to good and nice musical improvisation on a musical instrument! It is not so easy as car driving, and maybe not so fitting to the psychological potency of everybody, but still many peaple can learn can do it.
This shifts the question to 2nd one: Is the clumsy trading of an intraday robot, better than the daily manual trading of the trader? We assume the best trading expertise of a given trader in both daily and intraday and the best and programming expertise possible. For a while I was over-confident with the software engineering possibilities. I was thinking that if by manual intraday trading I can do better than daily set-n-forget trading, the so should a robot, that I would design to trade even in a clumsy way, but close to as I would trade intraday . But the present state of the art of software engineering does not really permit to program it to trade as you would trade intraday. And the clumsy intraday trading of the robot is so clumsy that is worse than the manual daily trading. So after trying a lot and programming myself many robots, it turned out that my intraday robots were always doing worse than my manual daily bars set-n-forget trading.
After 11 years trading with MT4 in forex, and having coded more than 10 thousand pages of
code, I ended in trading manually at daily bars (15 minutes spent per day) and not using
automated system. I decided so after measuring and comparing the two alternatives. There are two reasons for this that probably most traders tend to ignore.
1) The predictability falls rapidly as we move from large scales (e.g. annual, monthly weekly
and daily bars) to short time scales (hourly, 15M, 5M). See e.g. post 63 about the Pareto rule of predictability of time scales.
And the advantage of automation unfortunately, is superseded by the disadvantage of less
predictability. Thus the automated systems at ticks 1M, 5M and 15M etc have worse performance than the manual at systems at daily bars!!!
2) The technology of the Platform MT4 is inadequate to make code that will substitute the
human ability of pattern recognition. And thus running and supporting and re-adjusting an
automated system results in to more human attention in the long run of many years than simply conducting a manual system. Plus more uncertainty because an automated maybe
spectacular for say 6 months and then is losing for 2 years etc thus requiring new coding and new tests and so uncertainty. The industry may prepare software that drives cars in an automated way and this may be safer than manual driving statistically in the population, but for this millions have been spent, supper good operating systems and platforms have been designed for this plus large groups of software programmers and more than 10 years of testing. None of these are possible with MT4 which is rather poor to code e.g. pattern recognition. Therefore a simple manual system that is continuously assessed if we apply it or refrain from trading by human decision is by far superior.
3) All my comparisons and tests result to the same conclusion: Good manual trading (e.g. at USA security indexes like SnP500, DowJones, Nasdaq which have clear and strong 1-2 years trend either up or down) at daily bars is more profitable and mote stable than scalpers and automated trading in 5M, 15M, 1H, or 4H bars in Forex.
Now the obvious question is WHY EVERYBODY IS SO OBSESSED WITH SCALPERS? the answer
is simple! BECAUSE THIS IS PROMOTED BY THE BROKERS WHO HAVE HUGELY MORE PROFITS FROM SCALPERS, FROM BID-ASK SPREADS, COMPARED TO MANUAL TRADING ON DAILY BARS.
I conclude than any scientifically trained trader who has made good and objective research on this will discover it sooner or later.
After 11 years trading with MT4 in forex, and having coded more than 10 thousand pages of
code, I ended in trading manually at daily bars (15 minutes spent per day) and not using
automated system. I decided so after measuring and comparing the two alternatives. There are two reasons for this that probably most traders tend to ignore.
1) The predictability falls rapidly as we move from large scales (e.g. annual, monthly weekly
and daily bars) to short time scales (hourly, 15M, 5M). See e.g. post 63 about the Pareto rule of predictability of time scales.
And the advantage of automation unfortunately, is superseded by the disadvantage of less
predictability. Thus the automated systems at ticks 1M, 5M and 15M etc have worse performance than the manual at systems at daily bars!!!
2) The technology of the Platform MT4 is inadequate to make code that will substitute the
human ability of pattern recognition. And thus running and supporting and re-adjusting an
automated system results in to more human attention in the long run of many years than simply conducting a manual system. Plus more uncertainty because an automated maybe
spectacular for say 6 months and then is losing for 2 years etc thus requiring new coding and new tests and so uncertainty. The industry may prepare software that drives cars in an automated way and this may be safer than manual driving statistically in the population, but for this millions have been spent, supper good operating systems and platforms have been designed for this plus large groups of software programmers and more than 10 years of testing. None of these are possible with MT4 which is rather poor to code e.g. pattern recognition. Therefore a simple manual system that is continuously assessed if we apply it or refrain from trading by human decision is by far superior.
3) All my comparisons and tests result to the same conclusion: Good manual trading (e.g. at USA security indexes like SnP500, DowJones, Nasdaq which have clear and strong 1-2 years trend either up or down) at daily bars is more profitable and mote stable than scalpers and automated trading in 5M, 15M, 1H, or 4H bars in Forex.
Now the obvious question is WHY EVERYBODY IS SO OBSESSED WITH SCALPERS? the answer
is simple! BECAUSE THIS IS PROMOTED BY THE BROKERS WHO HAVE HUGELY MORE PROFITS FROM SCALPERS, FROM BID-ASK SPREADS, COMPARED TO MANUAL TRADING ON DAILY BARS.
I conclude than any scientifically trained trader who has made good and objective research on this will discover it sooner or later.
Someone here might put the objection: Look it was believed that automated car driving would never be as good as manual driving. But recent discoveries on automated car driving prove that is definitely safer than the human driving, practically with no serious accidents and can save millions of dead people per year, by car accidents. This may be so, but we must not forget, that millions were spend to develop software and hardware for automated car driving, and there is a serious social will to do so. On the other hand there is no serious social will to develop software for automated trading for fast capitalization and income! On the contrary the existing trading platforms, the last two decades still have serious drawbacks. The possible development of a sufficient reliable software that would create in a fast way capitalization starting from very few money, and thus creating a monthly income for people ,even if it is possible, is at a deeper consideration undesired from the economic system, itself which wants people to work for the business of those who have the capital, and thus control them based on their need to survive. If such a software was to be developed, then this would give access to financial freedom to the majority, which we know is not in the intentions of the capital oligarchy than controls the economic system. And therefore a trader is left alone to develop such a system, which sincerely speaking is not really feasible, by one person only. Neither a collective open source volunteered development of such a software is really supported by the financial system. Therefore we go back to simplicity and simple only mainly manual practices that a single trader can do, that although simple are not probable for the majority of the people.
So the lesson is, we should not underestimate the human senses, and reactions abilities. They always would leave robots behind.
There are traders that focus solely on robots. And there are traders, that entirely exile robots, as always failures. I think both are exaggerated and inaccurate assessments. The truth is closer to what I described above.
Finally, the experience of manual trading is totally different than robot trading. With manual trading you spend time to do the pattern recognition, while with robots, you spend time, updating them, back testing again, optimizing, reconfiguring, improving them etc.
Personally I make more money with the manual daily set-n-forget trading, than with intraday robot trading. It is not to forget though that this inequality is a function of both the personal trading expertise, and the present state of the art of software technology.
To be more precise, usually the best 100% automated intraday systems, that could be found in the web, during 2009, were 10 times less performing that the best manual daily set-n-forget system, that also could be found in the web.
During 2002-2006, I had coded my own backtest historic simulator , before the MT4 platform was introduced in the market, and independently from the tradestation platform. ( I considered tradestation, expensive to support with its monthly fees.) It was a huge monstrous software, in VBA-Excel programming language (in MS-Excel) and in some aspects had better features from the backtests module of tradestation (that I was acquainted and coded in it during 2007-2008), but also in some aspects it was worse. And during my backtest experiments of at least 120 sophisticated systems, I had discovered that the best 100% automated intraday system could be as low performing as 10 times less than the best manual daily set-n-forget system. The subjective inspection and pattern recognition of manual trading, seemed to be indispensable and almost intractable to code. It was only later, when I started coding in tradestation, and even later in MT4 platform, during 2010 and 2011, that the evolution of the relevant technology and the widely circulated free tools, from a collective work of millions of programmers and traders, made this gap became less; say 3 or 2 times only worse than the best manual daily set-n-forget system
In order to combine the advantages of robots with the advantages of manual trading, so that it is a stable solution what ever is the state of the art of platforms and computer programming, I offer here the concept of "Manual driving of robots". This is a concept where we utilize indicators and daily subjective observation and pattern recognition, where manual trading is superior, to derive smaller time intervals of some hours or days, of safe and favorable trading. This we may call excursions to contrast from trades. But these intervals are not single trades, but rather favorable times that a trading robot can trade with specific settings (e.g. a grid trader). When this time interval expires, we define again by manual observation (usually not faster than once a day) the next time interval and specific settings that the robot will run again.Thus a manual driving of robots (as a vehicle) creates two levels of trading elements: For the robot the element of trading is a trade, while for the human driver of the robot the element of trading is an excursion (which may conatin many trades).
So my final concept of manual versus robots controversy is essentially that the really good , safe and optimal trading, has a part which is manual which is irreducible to robots in other words it cannot be substituted by robots and it has also an automated part which is irreducible to manual trading in other words it cannot be substituted by manual trading.
There are 3 contexts of laws required in trading . The appropriate LAWS OF THINKING for trading, the appropriate LAWS OF FEELINGS for trading , and the appropriate LAWS OF ACTIONS for trading.
The Successful trading is based according to these three laws on
1) POWER OF COLLECTIVE SCIENTIFIC THINKING: A GREAT AND SIMPLE SCIENTIFIC PERCEPTION OF THE FUNCTION OF THE ECONOMY THROUGH SOME GLOBAL STATISTICAL LAW. E.g. The law of Universal attraction in economy: that big money attracts more big money in the capital markets, and this by the balance of demand and supply makes securities indexes of the companies , that are indeed the big money, to have mainly stable ascending trend, whenever one can observe such one. Valid statistical deductions can be obtained with simple statistical hypotheses tests about the existence or not of a trend, with sample size half the period of a dominating cycle). (STABLE GREAT SCIENTIFIC THOUGHT-FORM OR BELIEF FACTOR IN TRADING. )
2) POWER OF COLLECTIVE PSYCHOLOGY: A LINK WITH THE POSITIVE COLLECTIVE PSYCHOLOGY.(E.g. that the growth of security indexes also represent the optimism of the growth and success of real business of the involved companies. And we bet or trade only on the ascension of the index, whenever an ascending trend is observable). (STABLE GREAT POSITIVE COLLECTIVE EMOTIONAL OR PSYCHOLOGICAL FACTOR IN TRADING. )
3) POWER OF INDIVIDUALS SIMPLE , CONSISTENT AND EASY TO CONDUCT PRACTICE. (e.g. a trading system with about 80% success rate that utilizes essentially only one indicator in 3 time frames, simple risk management rules of stop loss, take profit, trailing and escalation, and time spent not more than 20 minutes per day. In this way there are not many opportunities of human errors in the conduction of the trading practice. Failed trades are attributed to the randomness and are not to blame the trader). (STABLE SIMPLE AND EASY PRACTICAL FACTOR IN TRADING)
We may make the metaphor that successful trading is the ability to have successful resonance with the activities of top minority of those who determine the markets.
In trading there are 3 components in the feelings that must be dealt with. 1) The feeling of MONEY itself, 2) The feeling of the UTILITY of the money 3) The feeling of the RISK of the money each time. What is called usually money management in trading is essentially RISK MANAGEMENT.
VALID STATISTICS AND PREDICTABILITY
We must make here some remarks about the robust application of statistical predictions in the capital markets.
1) The theory that the efficient markets and in particular that they follow a pure random walk is easy to refute with better statistical experiments and hypotheses tests. The random walk would fit to a market where the sizes of the economic organizations are uniformly random. But the reality is that they follow a Pareto or power distribution, therefore this is inherited in the distribution of the volumes of transactions and also in the emerging trends or drifts.
2) The statistical models of time series are more robust , when they apply to the entity MARKET as a whole and are better as non-parametric , and not when they apply to single stocks and are linear or parametric. The reasons is that a time series as a stochastic process , requires data of a sample of paths, and for a single stock is available only a single path. While for all the market the path of each stock or security is considered one path from the sample of all paths of all the stocks.
3) The less ambitious the statistical application the more valid the result. E.g. applying a statistical hypothesis test, or analysis of variance to test if there is an up or a down trend (drift) or none, is a more valid statistical deduction , than applying a linear model of a time series and requiring prediction of the next step price.
4) Multivariate statistics, like factor analysis, discriminant analysis , logistic regression, cluster analysis , goal programming etc are possible to utilize for a more detailed theory of predictability and of portfolio analysis, and sector analysis of the market and not only H. Markowitz theory.
5) In applying of the above applications of statistics, the researcher must have at first a very good "feeling" of the data, and should verify rather with statistics the result rather than discover it.
6) The "Pareto rule of complexity-results" also holds here. In other words with less than 20% of the complexity of the calculations is derived more than 80% of the deduction. The rest of the 20% requires more than 80% more complexity in the calculations.
To see nevertheless why manual traders in their majority also fail in creating a reliable trading system, that may lead them to financial freedom, starting from small amounts of money read post 62.
IN FAVOR OF THE FULLY AUTOMATED TRADING, we will mention the Unger Academy,
which has solved the problem of an automated being unstable, with a large portfolio of autmated systems, and has also implemented advanced, backoffice money and ris managment rules, that improve dramatially, initially inadequate systems
For the risk managemt the book by Andreas Urger is the next
No comments:
New comments are not allowed.