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!

Algo’s and Psychology

They say the hardest aspect of trading is psychology. If you have been trading for a while then you will verify that this is indeed true. Trading is such a mentally driven business that two people can have exactly the same strategy but apply it in totally different ways and achieve completely different results. The question is why, and how does having an Algo help?

Before we dive deep into the topic let us consider the perfect trader. This would be someone who has:

1. A strategy which gives them an edge,
2. The ability to execute it perfectly each time regardless of winning or losing streaks, and
3. The capacity to evaluate their performance objectively.

Now the question is how well do you match up against the above 3 points? The honest answer is most likely “not very well”. The reason for this is that it’s extremely difficult for any human being to remain unaffected by their trading performance. Someone may experience a winning streak in which case they will start to believe they are above their own system or rules and start to deviate from them. It’s human nature! They might get overly confident and start over risking on each trade for example. Someone else might be experiencing a losing streak and then be tempted to abandon their trading approach altogether or not take valid setups due to fear. Does any of this sound familiar? We’ve all made these mistakes, the question is why?

We’re Not That Good…

The answer is that we are not machines. No matter how many times we reinforce the age old maxims of “follow your rules”, “trade what you see”, “take every setup which meets your rules”, “don’t be short term focussed” etc, it is incredibly hard to remain unaffected by our profits and losses. We are emotional beings at the end of the day and almost all our decisions are made emotionally and then justified through a process of rationalizing. This manifests in several ways. Trader A may be doing very well and decides to increase his position size. Chances are that he will be more greatly affected by the outcome of this trade as it will have a higher amount of profit or loss than what he is used to. Put yourself in his shoes. Let’s say you experienced 2 losing trades in a row – how will you be feeling? Nervous? Cautious? What if another setup presents itself – will you take it automatically or will you hesitate to pull the trigger in case you get another loss? What if this next trade loses, how will you really feel? Upset? Angry? Tired? And now another trade sets up – how likely are you to take it? Let’s say fear kicks in and you don’t take the trade, choosing instead to watch what it does. The market moves exactly as you predicted and to top it off moves so well in fact that you would have recouped all of your losses. How would you now feel – pretty exhausted and frustrated! This emotional rollercoaster is what 95% of retail traders go through on a regular basis.

Emotional Control

How does having an Algo help? For a start it has no emotions, hence it will execute every trade which sets up exactly as outlined in its trading rules. There is no fear, no greed, no hesitation, no second guessing – basically none of the flaws of human traders. This total objectivity is what gives Algos an edge over humans. The caveat is that the Algo needs to have effective trading strategies and strict risk management built into it. There is no point having an Algo that doesn’t have an edge as all it will be doing is executing a strategy that doesn’t work.

Algo or Quant systems (synonyms) are becoming increasingly more sophisticated. With the advent of artificial intelligence and deep learning, it is now possible to build complex trading systems which can replace human traders. In fact experts predict that the number of human traders in professional firms will reduce dramatically over the next decade due to the proliferation of AI based trading systems.

Algos Trade Perfectly

Let’s see how Algos perfectly address each of the 3 points we highlighted earlier:

1. A well developed Algo has a proven edge because it is able to quantify that edge by going back over Billions of data points to identify repeatable patterns in price behaviour and model these effectively going forward. This means that you should be able to know the percentage success rate of each setup and overall strategy before placing it. This is infinitely superior to a person doing this manually.

2. The ability to execute a trade perfectly each time – an Algo will take every setup in accordance with predefined rules. Some Algo’s have rules which can be altered while others are fixed. Some Algo’s can have advanced risk management such as reducing positions size during a losing streak or having a maximum loss threshold to stop trading if reached. The point is that every aspect is objective, so if it doesn’t take a trade it’s because there was a logical reason why it didn’t, as opposed to an emotional reason.

3. The capacity to evaluate performance – our Algo’s at EnigmaSignal have the intelligence to analyse the trading tendency and performance of every trader using our system. This allows for meaningful statistics such as knowing how far price moves against a trader before moving in their favour (helps with stop loss placement), identifying the maximum distance that price went in their favour before turning (to fine tune targeting), and many other useful features. The EnigmaSignal Algo allows you to learn more about yourself as a trader and how you really trade versus how you think you trade. Any Algo should allow you to evaluate your performance meaningfully and then you can use the results from that evaluation to improve yourself as a trader.

Example

Here’s an example of an Algo beating a human trader technically and psychologically. The chart below is a trade that one of our Algo’s took on the DAX market. It identified a short trade setup and took the trade without hesitation. It then trailed the stop loss strategically until it got stopped out –netting a whopping 72 points reward for an 11 point risk trade! A fantastic outcome! A human trader would have been tempted to exit the position much earlier at 20 or 30 points profit as this would have been a great reward for the amount risked. Just imagine how difficult it is to be nicely in profit but to sit tight and do nothing because your rules stated you need to trail your stop loss? Let’s say you are 40 points in profit – would you really be able to sit there and do nothing? What if you’re 50 points in profit – everything in you will be screaming “take the money!!” and in all likelihood you would ignore your rules and go with your impulse. If you had done that then you would have missed out on the full profit potential of the trade and set a bad precedent that breaking your rules is acceptable.

Example of algo trading out performing human trading

Conclusion

So there you have it – a brief overview of why Algos are superior to humans and also why they help with trading psychology. The point is that if you don’t have to experience the emotions of trading then there is no psychology to manage. If your machine is doing all of the trading then you will not be held back by any emotions of fear, greed, uncertainty, or hesitation. The only psychology needed is how to stay committed to your Algo and not interfere with it.

If you are looking for Algos that deliver consistent profits regardless of market conditions, as well the peace of mind you will receive by not having to manage your psychology, then enquire about EnigmaSignal. Attend a webinar or get in touch to find out more at www.enigmasignal.com. Our Algos are built by Mathematicians, Data Scientists and Deep Learning experts with a combined trading experience that spans multiple decades.

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

The 11th Commandment “always use quality data”

OK.  So maybe that’s not exactly true.  But if Moses had been a trader he would have snuck that one in there.  Rather than write about data …. we’ve created a video blog for this one. 

It’s only three minutes long but should give you a good idea of why investing in data is a smart idea.  Do you want quality trades?  Better make sure your numbers are accurate ……

PS.  In the narration I say its Nasdaq data, it isn’t.  It is in fact S&P.  I also make a horrific error in my pronunciation at the end.  I would re-record it but TBH … it’s too late at 1130pm.