The Quants are Coming!!

Recently, a report was pushed that stated that Goldman Sachs has replaced 70% of their day traders with Artificial Intelligence based systems and is now recruiting more programmers than traders for its day trading offices. Wow! Let that sink in for a moment – if such an established institution is doing that, then the rest are not far behind! What will this mean for day traders going forward and how do we compete?

Day trading is under threat from technological advancements just like any other profession. We have seen how the technological revolution has replaced countless jobs in traditional sectors such as Manufacturing, Retail, and Services. This meant that low skilled jobs began to be replaced by robots while many medium skilled jobs became semi-automated. This led to layoffs in these two categories, however, highly skilled roles remained unaffected as they were too complex for machines to replicate. That was until now!

A Highly Skilled Profession

Trading is a highly skilled profession that requires multiple qualitative and quantitative informational inputs to make a single trading decision. Information is analysed, interpreted and reacted to by traders in different ways which leads to widely differing outcomes. This is further compounded by which market a trader actually trades as well as their risk profile and trade management method. Two traders can get the same information, react to it in the same way, even put on the same trade but get totally different results because their personalities are different and therefore how they manage their trades will be different. One trader may risk more than the other, another may exit the trade at a different price than the other and so on.

The above complexity is what traditionally made it difficult for machines to compete with humans. Mastering this complexity would require machines that could think for themselves, be self-aware of their own performance, and be adaptive to changing market conditions.

Enter Artificial Intelligence…

The last decade has seen massive strides forward in Artificial Intelligence and Machine Learning. We are able to build more sophisticated computers than ever before, with capabilities that were once thought impossible. We can now create machines that literally think for themselves. It is possible to create algorithms that self-learn so that their performance improves over time without any human input. Traditionally quant trading systems were focussed on speed of execution, beating other market orders and placing their orders first. This was powerful when combined with identifying large orders. For example, a large buy order might enter an exchange, such as NYSE, for a particular stock. A Quant might detect this large buy order and proceed to identify the stock and sell it to the large order buyer for a small profit – all within a split second.

Another Quant might use speed to enter an order ahead of anyone else, especially if they expect an imminent change in price. For example, let’s say there is a major economic announcement which is expected to send the markets crashing. While regular traders are busy pressing sell buttons, a Quant system could identify this bearish sentiment and enter a short trade faster than anyone else, thus benefiting from that extra point of movement by getting in early.

It’s All About Speed

Goldman Sachs until recently was a master of the speed game – otherwise known as Latency. Now, however, they have the ability to perform more sophisticated forms of trading thanks to their investment in Artificial Intelligence and algorithmic trading starting to pay off with everything from commodity trading to currency trading and futures trading to day trading stocks. Being endowed with very deep pockets means they can recruit the smartest PHD mathematicians and Quant developers to create more sophisticated trading systems. While these certainly beat retail traders in terms of speed of execution, it is difficult to say the extent to which they outperform traders in normal trading as the details of what they do is kept highly secret. We can make an educated guess, based on their past strength in Latency, but they will dominate the lower time frames such as sub 1 minute to 15-minute time frame charts.

Higher Time Frames

Where traders can compete with the Quants is on higher time frames such as 60 min charts and above, particularly the daily timeframe. The reason for this is that the higher time frames do not require speed as an advantage and so allow enough time for a human trader to analyse the markets, identify a trading opportunity, and execute a trade on par with a machine. It may take a machine a fraction of the time to follow this process, but nonetheless, a human trader can achieve the same results since time is not critical. By contrast, speed is critical when trading the lower time frames as it impacts more measurably on the profit and loss of a trade. This tells us that we can have a chance to compete against the Quants by working on higher time frames.

Up Your Game

Another way we can compete with the Quants is to gain access to very sophisticated trading systems which use Artificial Intelligence and day trading rules at their core, just like the big boys do. Although this can be expensive and more suited to the serious trader, computing power and program sophistication have made quantum leaps in the last decade making it more accessible than ever before. Companies who develop these AI trading systems build a team of PHD level mathematicians to create trading models and strategies, Machine Learning specialists who can add Deep Learning to the trading models, and experienced traders to fine tune and monitor the application of theory to practice.

Development takes a lot of time… at least 12 months of continuous development before a system will begin to start to work. The next 12 months will then be spent fine tuning and training the AI. This sounds like a lot of work, and you’re right, it is. This is why you find large teams of PHD mathematicians and programmers working together in multiple teams in large investment banks. This is exactly what we have at EnigmaSignal, as it truly takes a team to develop something that works.

Artificial Intelligence in Practice

The screenshot below is a screen capture of our system in action. It was set to auto trade the S&P 500 long on the 24th of August, 2018. It took 4 trades and won 2. The interesting thing is that it ended up with a profit of 64 ticks over the 4 trades despite 2 of them being losers! It entered a long trade on a break out of an identified resistance zone and trailed the stop loss until it got stopped out later in the day. Our Machine Learning is now starting to suggest better entry and exit points for future trades as a result of the many trades that it has taken and analysed. What this means is that we will be getting increasingly tighter entries and exits resulting in gaining more profits per trade just by listening to its real time suggestions – very clever stuff indeed.

Trading chart August 24 2018

Conclusion

As more and more Algorithms are used to trade the markets we will only have one of two choices; join them or beat them. Ideally, we want to do both – join them by building our own highly sophisticated algorithms and Quant trading systems and beat them by trading on higher time frames. This trend will only continue its pace, so retail traders need to adapt or die. If you wish to have access to cutting edge algorithms then get in touch with us here at info@enigmasignal.com. You can also visit our site to book a demo at enigmasignal.com/webinars and download valuable resources that are normally reserved for students of our online trading academy, for free today.

EnigmaSignal Trading Chart September 3 – 7, 2018

EnigmaSignal is a unique artificial intelligence based trading software. It works on all timeframes for just about anything you can trade. In this example trade, the time frame traded is hourly and we are trading the S&P 500 US Index. This is a timeframe that we see being used by many of our members who work full-time and use EnigmaSignal to generate a really nice second income.

What we have here is the chart for the last week.

Five days trading and four trades selected by EnigmaSignal AI and then traded automatically. That’s the beauty of the AI approach. It will trade like a human trader, but more reliably – without you having to spend all your time in front of a screen. All of these trades were made in my account whilst I was in Costa Coffee. Now of course, you don’t have to let EnigmaSignal trade automatically and in fact, we have many people that prefer to use it for high probability signals that they can then choose to trade themselves. Why does that work so well? Simple. There is no interpretation of the signals. The Artificial intelligence will interpret them for you, and simply show you the results.

This series of trades generates a superb 1938 ticks of profit. That’s a pretty amazing return for someone risking only £1 / tick. £1938. And the time taken? No more than 15 minutes per day to check the strategy and make sure that everything is set for the next 24 hours. EnigmaSignal is simple to use, and our complete training package covers everything you need to know to make EnigmaSignal trade according to your rules. Most of the complexities of trading are taken care of by the Artificial Intelligence software, which controls your risk and “thinks” about trades hundreds of times per second so that you don’t have to.

Ready to try EnigmaSignal for yourself? Get started today with our 30 Day Trial for USD $99!

Semi Versus Fully Automated Trading

Last week we looked at the benefits of using an algorithm to trade versus trading manually. The overall message was that an algorithm will outperform any manual trader as it does not suffer from emotional attachment to a trade and will flawlessly execute its trading plan. In this article we compare semi automated algo trading with fully automated to see the pros and cons of each approach.

But why?…

The first question which you may be asking is why have a semi automated system if you have a fully automated one? Well, the answer is control and preference. A lot of people will find it hard to trust an Algo to do all the trading for them and instead prefer to sit in front of screens and watch as it trades…and probably be tempted to tamper with it as it does so. Although this seems silly, it comes down to psychology. If you are struggling to trust your system then the only alternative is to work with your psychology and find a way to feel in control without interfering with its performance. How do you achieve this? Simply by setting up an extra step in your Algo that requires you to confirm a trade before it takes it.

To leave or not to leave…

Can you sit back and let your system trade for you without interfering? Are you constantly tempted to intervene? Do you adjust your stop or your profit target or skip a setup altogether because you second guess your strategy? In that case its best if you start off with a semi automated solution rather than a fully automated one. What you need is to build a control panel into your Algo so that as soon as it identifies a trade it pops up a box asking for confirmation to take the trade. At least in this instance you will feel you’re in control while still adhering to your Algo.

Easier transition

Can you sit back and let your system trade for you without interfering? Are you constantly tempted to intervene? Do you adjust your stop or your profit target or skip a setup altogether because you second guess your strategy? In that case its best if you start off with a semi automated solution rather than a fully automated one. What you need is to build a control panel into your Algo so that as soon as it identifies a trade it pops up a box asking for confirmation to take the trade. At least in this instance you will feel you’re in control while still adhering to your Algo.

Another important reason for having a semi automated solution is that it is an easier transition from manual trading. Going from manual to Algo in one step is quite a jump. If you are used to being in front of charts, placing a trade, watching it, etc. then you will struggle to have confidence in an Algo where you effectively do nothing while it trades for you. What are you going to do with all of your new found free time? Traders often are trapped into feeling that they need to do a day’s work to justify their earnings.

We are all used to the “hard work” mantra and although we know Trading is totally different from any other business out there, we still approach it as though it’s a conventional business. It is unconventional to earn more in one trade than what most people see in a month especially when you consider that the time you put into that trade may have been minutes or hours rather than a full month’s worth of hours! So if you need to feel like you have “worked” then a semi auto solution may be best.

It’s all about efficiency

Isn’t it strange that we normally look for efficient ways to run our businesses yet in trading, the majority of retail traders still trade in the least efficient manner possible i.e. manually? Considering how sophisticated Algos have become now because of Artificial Intelligence it is baffling that most traders still choose to trade the old fashioned way.

Nowadays it’s possible to automate your entries, your risk management, trade progression and many other aspects of trading. So instead of having to rely on calculating how much to risk on a trade manually, you can create a script that calculates what percentage of your account to risk on a trade the moment you hit the buy or sell button. Let’s say you went long and wanted to trail your stop loss every 10 points or below the low of every bar that moves in your favour then you can create a script that does that and switch it on as soon as you are in the trade. In fact even if you want to do your analysis and trade execution manually, you can hit a button to take over from the moment you enter a trade to manage it to a profitable outcome.

One size doesn’t fit all

The overriding message we want to get across is that when it comes to using Algos, one size doesn’t fit all. The best option is to have a fully automated system which also has semi auto options built into it so that if you wanted to use it in that mode then it allows you to do so without having to build a whole new system altogether. The biggest asset we have as traders is our mindset, so It’s very important to find a system that fits your personal trading style until you are comfortable transitioning to a fully automated trading solution.

At EnigmaSignal, all of our trading is run by Algos so it’s interesting when we come across traders who don’t trust Algos totally and prefer to trade manually. What’s interesting to note is that these manual traders are very happy to have a semi automated solution take over a trade once they pull the trigger. I’m pretty convinced that in several months time these guys will want to fully automate their trades once they see it managing their trades efficiently.

What does a semi auto solution look like?

The screen shot below shows what a Semi Auto Algo looks like. It is taken from our main Enigma Algo platform that we run and we built this feature so traders could choose whether to take the trade manually or to auto trade it totally. The menu allows us to customise any settings for a trade such as stop loss placement, targeting and so on. It also allows us to click a button which says “Auto Disabled” to turn it into Semi Auto mode. All a trader needs to do in this mode is hit the “Enter Now” button to take a trade once it sets up. The stop loss and the trade management will then be implemented by the Algo automatically.

Semi automated algo trading system
In the above image, there is a green bar circled at the bottom right section of the chart. This was a valid long trade which would have been entered automatically or flagged up to be entered manually.

One other benefit…

One benefit of semi auto trading is that it allows you to apply discretion in your trade selection. Although discretion can be a bad thing normally as it means you are just reacting to the market without a plan of action, some traders want to be able to skip setups if they feel there is a valid enough reason to. This may not be a bad idea if your Algo is not sophisticated enough to identify changing market conditions and skip certain setups as a result.

You have to remember that it will take a long time and a great deal of sophistication to create a profitable Algo. It took us over 18,000 hours of development over several years to create the Enigma System that we now have, so it’s easy to understand that most people do not have this amount of time or a large reserve to fund such development.

Conclusion

We still maintain that although we have outlined the benefits of semi auto trading, having a sophisticated enough Algo is by far the better option. In the meanwhile, the semi auto option can be a stepping stone. On the other hand it is also fine to give people a choice rather than force them to adopt one approach or another. The main goal of trading is to make consistent profits, so whether you do this in a fully or a semi automated way, just get going with it. If you are looking for institutional level Algos to complement your trading then get in touch with us at info@enigmasignal.com or visit enigmasignal.com to find out more.

Ready to try EnigmaSignal for yourself? Get started today with our 30 Day Trial for USD $99!