Advantages of automation
If you’re in the trading world, you must have heard, pretty many times, about the importance of discipline. They always say that you must have a plan and you must stick to it, in order to succeed. And if you have become a pretty good discretionary trader, just with a problem of keeping your discipline, then the next logical step would be the automation of trading.
If you’re a forex or CFD trader, then you’re probably already using Metatrader, which can be used for automated trading, that is, by using “expert advisors” in order to trade. Granted, it’s not rocket science to have strategies and indicators programmed in MQL, but it requires being programming savvy. Also, programming services are not overly expensive and are available, if you know where to look, for instance on our website
Once that you have a strategy that seems to be working in a discretionary trading fashion, it is very probable that the strategy will work automated. Automation frees you from the need to be disciplined. The program is disciplined in your stead. However, one has to be cautious about it, so that the program does not execute trades also in conditions that are seemingly fine, but which you would have excluded, should you have traded discretionary. For instance, a moving average, such as moving average being below last hour bar, happening in a Monday. The market opened with an over-weekend gap, and the system will consider this trade, following your idea, but however it uses a moving average which is below market, containing bars from Friday. So it will go long instead of probably not trading or going for a short, as the market would be attempting to close the gap during the day.
Automation gives this important advantage, backtesting, that is, testing how your trading system would have worked in the past. Backtesting facilities differ from a language to another. As long as one needs up to one-minute data, Metatrader is fine; however, tick-level backtesting can be accurately done only in other platforms. Another important aspect of backtesting is optimization, that is, repeating the same backtest over and over again,while considering all the possible variations of parameters, which would indicate which combination of parameters would be the best approach. However, testing this way will increase exponentially the required time, but the results would be pretty solid.
One has to consider that, time to time, the market is changing its inner working patterns. The markets of today are not the markets of the 80s, when traders were the “masters of the universe”. Markets contain much more intraday volatility and can break patterns extremely easy. Stock market books are not quite applicable to forex, and are probably not too much applicable to stocks anymore. Technology changed the market, and it’s continuously changing it, at a higher and higher rate. Speed became of paramount importance, and at its lower levels, stock and forex have become “high frequency” markets, with trades taking place at the speed of a nanosecond. In these conditions, it’s important to devise algorithms that are suitable, that have a good track record on enough time. Due to changing market conditions, an algorithm cannot perform all the time, therefore looking for an algorithm that performs constantly for years will be a daunting task. Even HFT algorithms used by top hedge funds don’t resist more than a few months. So the thing is : do not take it too seriously, do not commit money you don’t afford losing, backtest and optimize for best results, and hope for the best on the market. Hit and and run, rethink strategies, hit again! There’s no definitive trading algorithm, and you don’t have to knock yourself out! Using a VPS server is very important when it comes to automating your strategies. Unless you’re using a platform that uploads your strategy to a trading server, you have to use such a server, because you need to have the platform open 24 x 7 so that the automated system will trade effectively. And that’s something you can’t do on your computer from the bedroom, which needs to be shut down, and used in the daytime for something else. Also, such a computer is prone to power and internet connection outages, with serious implications over your trading. A VPS hosted server a datacenter would solve the problem. It also relieves you from the pain of watching positions going into a loss. It’s said that the psychological value of a lost pip is three times the psychological value of a won pip.
That’s it, folks! Find an optimized algorithm that works, use it, then get out when it’s not performing anymore, and run it comfortably from a VPS server.