BPA trading room Q&A: May 6, 2015
I’m sure that you looked at automated trading in your long experience. What are your thoughts on automated trading for small volume retail traders, especially for those who cannot usually control emotions?
Audio duration: 3min 55sec
Sell! Sell Now! No! No! Buy! Buy! Sell!
I think traders using automated trading are going to lose. My experience is I spent – I don’t know – more than 10,000 hours testing all kinds of trading ideas, and I spent a whole bunch of time trying automated trading, and for me, I kept seeing exceptions to every rule. So I’d write systems, and as I’m getting triggered into a trade, I’m looking at it and I’m saying, “Wait a minute, that bear bar is bigger than I think it should be. I should not buy here.” Or the signal bar – although it’s a signal bar, it’s small relative to the past three bear bars. So I kept overriding the system and I ended up concluding that my personality is not good for automated trading.
Also, in my gut, I felt that if it was that simple, Goldman Sachs would already be doing it, or they would be doing the opposite, and I think it would be really hard to make money doing it. I don’t know of anyone who’s made money long term, doing automated trading. Unless you’re a high frequency trading firm or a hedge fund and really are extremely good with the math, I personally would not do it.
It sounds good and TradeStation makes it sound like it’s possible, but the reality is I think it’s really, really difficult to do it. The market is like melted plastic, so any pattern that you have, you have to be able to deform it in your mind and stretch it to extremes beyond which you thought were likely. And any back-testing that you do with automated trading, is limited because they’re sample errors. The market behaves differently at different times, and I’ve mentioned many times before, the high-frequency trading firms, most of the algorithms they use, they just use for a few days, maybe a week, and then they change because the market changes. And if you do automated trading, and you do testing, and you find something that looks like it works, it works in that time period. And if you look carefully at your system, you may discover that there was one huge win, and if you take that huge win out, the system loses money. Or there might be two huge wins out of 15 trades, and if you take those out, you lose money.
And the message there is, if you take the trade – if you’re doing it automated and you do not trade today and you go back tomorrow to automated trading, and today was that one big win that you needed, then your system is left with all the losers and you end up losing. So I don’t have time or energy to talk about it, but I think the solution is to really work on your emotions and not on automated trading – and it’s hard, and it’s hard for all of us.
They’re out to get me
I remember I used to get so upset. I used to take things personally. “They’re out to get me. I’m just not good enough. I don’t deserve it. I’m not loveable.” Anything you can imagine. And eventually, I just got past my emotions and I came to accept – strongly accept – that nobody cares; nobody knows I exist; nobody cares if I exist; nobody’s trying to take my money; I don’t have enough money for them to take, and I’m just out here trading just like they are. I’m doing it on a much smaller scale than Goldman Sachs, but I’m doing what they’re doing. And if I’m objective and I do things as well, and I don’t make mistakes, I can make money. And I can make money long term.
But it’s all on me. Eat what you kill. Everyone wants a protector; a God, a mentor or someone to guarantee that they will not lose money. That’s not the way the world works – especially the trading world. There’s no one there to watch out for you and you have to do it on your own, and it takes a long time to get to that point, but you can do it, right? But, it’s nice to think an automated trading system will protect you from yourself, but I think you’ll lose money. I think the answer is, to just be patient, take months or years to work on yourself, trade very small, and go in with low expectations. And then once you’re consistently profitable work on increasing your size.