Friday, 19 August 2011

My Most Difficult Challenge in Automated Trading

One of the most difficult challenges, at least for me, in Automated Trading is to allow the automated scripts (or robots) to run without any human intervention with its open/close signal logic.

Take a recent example, I decided to close an opened buy trade - which was placed by my robot - early for a small profit, instead I missed out on a big run up (several times my profit). Talked about a missed opportunity. Clearly, I failed to trust the capabilities of the automated script and let my human emotions take control instead.

There are two camps of traders in this area: (1) traders who will never interfere with a robot's trade (let's call them hard traders for simplicity); and (2) traders who will always trump the robot with human discretion (let's call them soft traders).

In the first camp, I have seen hard traders who would rather watch their very profitable trade turn into losses than to interfere with the robot. The typical wound-healing statements made by them are that as the robot had been backtested and had produced a historically profitable equity curve, these losses are just part and parcel of the automated script. My problem with having this view is that there is no evidence that interfering with the robot's trades will diminish its long-term profitability. In fact, the opposite could be true - it may increase the robot's long-term profitability - and unless someone publishes data to show that human discretion will result in a direct drop in the equity curve of the robot, I will continue to have difficulty accepting the hard trader's view.

In the second camp, I have seen soft traders who would discern every open/close signal generated by the automated scripts, and place a trade manually after assessing the current market conditions. Again, I find the soft trader's view hard to accept as you may have lost some profits during the assessment as the market moves against you. Also, the benefits of an automated script are precision and speed, both of which are not utilized by the soft trader. This, to me, seems to defeat the purpose of having an automated script in the first place.

I have identified several factors to discern whether I should interfere with an automated script:

1) Upcoming news or events that may work against the robot (wrong direction).
2) Volatility (whiplash profitable trades turn into losses).
3) Volume (too thin to trade).
4) Two robots that may have conflicting trades (one opens a long, and the other opens a short).
5) Major resistance or support levels reached.

These are in order of importance (hence I would consider 1 as more important than 5).

In conclusion, my view lies somewhere between the two camps. However, as a trader with an engineering background, I would imagine the future with an automated script that is capable of processing huge amounts of data in order to make decisions as close to humanly as possible. This would be made possible by improving technology, which in turn would lessen my challenge of having to trust the robots to run without human intervention.


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