Many traders start out with algorithmic trading with the view that they have found the secret of success that will bring them wealth easily, this is very far from the truth, read this article which will help you save time and money. To start traders need to be aware that all the big banks and brokers have already tried any idea you may have come up with and they have the best brains in the industry that money can buy, you cannot compete with them especially with high-frequency trading (HFT), but you can compete with your fellow retail traders.
"Wall Street Algorithms that decide when to buy and sell are struggling to keep up with central banks and Donald Trump"
What Exactly is an Algorithm by Definition?
An algorithm is a procedure or formula for solving a problem, based on conducting a sequence of specified actions. A cTrader cBot can be viewed as an elaborate algorithm. In mathematics and computer science, an algorithm usually means a small procedure that solves a recurrent problem, in this industry, it is also known as an Automated Trading System (ATS)
Algorithms That Work For Traders
Probably the best use of an automated system for either trading or as a signal provider is when the trader has a system that they have been using manually with success and now want to automate their strategy so they can focus on other income channels while trading. Systems that are doomed to failure are the ones where the trader has no clear idea of what they want automated, but they still throw time and money at it.
Semi-Automated Trading Robot
The products we sell are semi-automated and although it is possible to configure them for accurate entry and exit points due to a combination of technical indicators, advanced risk management and fundamental risk management, the trader still needs to be experienced to identify when a position should be closed due to unforeseen market events.
Manual Trading System
Some of the best uses of an automated trading system are where the trader has been using a manual trading system for a while with success and they feel that a computer program could do the task for them so that they can focus on other manual trading strategies, this is almost like cloning the trader which increases profit. Converting the traders manual strategy into an automated trading system will require the trader to provide a detailed written specification of the strategy so that the system that is finally delivered matches their manual trading system.
Manual Signal Provider
Another use of an automated system is to provide the trader with signals in the form of a pop-up window, email, SMS text message or another social media alert like a Telegram message when certain conditions are met on the chart which can show the trader an opportunity to either enter or exit a trade. We all know that waiting for an indicator or candlestick pattern to form is very time consuming and this task can easily be automated. Automation of signals frees the trader so that they can focus on other areas to generate an income.
Magic Money Machine
We have many traders who ask for an automated trading system that will give a good annual return with low risk and with no human interaction, so you start the robot, sit back and watch it print money, on top of that they only want to pay £50.00 for the robot.
There is a reason that so many traders lose money with automated trading systems and that is their expectations, the financial markets have so many unpredictable events including fundamental news and social media postings that no trading system will be able to manage the risk at all times.
Correct Use of Automated Trading Systems
Professional traders do not have just one or two automated trading systems running 24/7, this simply will not work due to the unpredictable nature of the financial markets Instead, they use very specific algorithms for very specific market conditions and these are turned on and off once these conditions are identified, the hardest part is identifying the best time to start and stop the robots.
Portfolio of Algorithms
One of the best methods to use automated trading systems is to have a portfolio of algorithms with each one designed for different market conditions, the trader would have analysed the market behaviour and selected which trading system to use depending on the current market, sometimes no system will run until the right time. An example would be an algorithm designed to trade news events when the price is very volatile, another example would be a trading system that favours a bullish trend using technical indicators.
Disadvantages of Algorithmic Trading
- Automated trading systems will not continue to trade in profit endlessly and you will find that other traders will create algorithms that will use similar patterns n the market and erode any edge that the trading system had in the markets. In other trading strategies, with small margins, the fees involved can quickly outweigh any profits.
- Automated trading systems are not able to adapt to the ever-changing market conditions that only a human trader can identify and act. One of the biggest difficulties for the robots is to know when to turn them off, or when they have outlived their lifespan. You will find that losing periods are sometimes followed by periods of winners and there will always be a risk of switching the robot off just before the next winning streak begins. If an automated trading system is no longer viable in the current market conditions it will only continue to generate losses.
- It is common in the markets to have unpredictable behaviour like Large spikes in volatility and flash crashes and these markets events can be very challenging for algorithmic traders. It is a fact that when the volatility increases then the risk of slippage and large gaps overnight increases and if any leverage is being used by the trader this can prove fatal and blow an account.
Do Not Over-Optimize
While the backtesting of your automated trading systems can be used to test its capabilities prior to any live trading, there is still a risk that it may be over-trained to fit the historical data over certain trends. You can train the robot on historical data and produce excellent results in reacting to the trends from that data, but when you run it on live data in the markets it can struggle to create the same results due to the difference between the live data and the data sets it was trained on. Most traders can be given a false sense of security into creating what they believe to be an infallible trading plan, which creates returns under very specific market conditions which may never happen again.
NO ONE CAN PREDICT THE MARKETS CONSISTENTLY.
IT'S ALL ABOUT ODDS, STATISTICS, PROBABILITIES AND AVOIDING THE RISK OF RUIN.
Henri Simoes - Trading Legend
Price Prediction & Automated Systems
There are more automated trading robots than ever before being used by both institutional and retail traders, these robots follow pre-defined patterns that have been set by the human traders, a typical example would be where a robot would open a long position when a stochastic RSI indicator is oversold, common trade patterns like this are built into an untold number of algorithms. These days the price reversals are directly influenced by these trading robots that are all running at the same time.
How Much Should You Pay?
The big question is how much should you pay for a fully automated trading system?
If you had a system that has confirmed historical trade results for the past 5-years and made on average £10K per year, how much would you pay for it? You certainly would not pay £50K as this would assume that you would make £50K in the next 5-years which is your return on investment (ROI), anything after this year is pure profit. Also, you would not pay £100 as this is just 1/100th of the actual results, a value of £1K to £3K would be reasonable, this is due to the fact you cannot guarantee the forecast of the next 5-years, but this is all subjective.
Realistic Example of ROI
If a trader purchased a trading robot for £50.00 and they managed to make £500.00 in 1-year that is a 1000% return of investment (ROI), we do not promise that it is possible to get rich with our automated trading robots, the potential to make money is there as well as lose money, it all depends on your settings and how much you want to gamble.
Remember that there is no such thing as an automated trading system that will simply print money for you, what might work this month may not work the next, the markets change in cycles and you have unpredictable events that happen out of the blue. As an algorithmic trader, you will need to try and counter these events with hard logic in your trading system.
If you would like to learn how to build your own automated trading robots using the cTrader trading platform then come and visit our school, we have a hands-on approach to help everybody learn as fast as possible.
We provide a custom development service to help you build your automated trading systems, signal providers or indicators.