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!

flatline. verb. fail to increase; remain static.

The headline is the dictionary definition of flatline.  In trading terms, it is about right.  That’s pretty much what most markets did today.  I watched none of them as I was busy coding a few enhancements to EnigmaSignal “Quant Trader” (EQT).  Yes, we have a name for the product.  That’s what we have built, a personal quant trader.  A Quant Butler if you like.  Personally, I’d like it called Joe 90 after a hero of my youth (see video below). Brits and Aussies will know why.  Americans probably not so.

The great thing was EQT kept working for us.  Right now we have two nicely profitable algos coded and we have another 4 ready to go.  All well tested and now running with real money.  Anyway….todays trade of the day comes from our HTF50 trade type.  Thats Higher Time Frame (scenario) 50. 

Long and detailed set of rules behind it, but it delivers. 

Usually 2-3 small losses a day and a nice winner.  With a risk/reward setting for us of 2:1 that means it delivers a consistent 50 ticks a day (25 forex pips).  That’s 6525 pips on an annual basis, which we like very much.  And that’s from one trade type.

I ended up as a late entry trade but still delivered 150 ticks or 75 pips.  A nice $570 profit with a maximum risk of $133.  Quite happy with that as a risk-reward.  Notice the stop chases up the trade.  Fully adaptive to market conditions (and also configurable for aggression levels).

The real key?  Would I have taken this trade?  I don’t think I would in all honesty.  I wouldn’t have taken the two losers either, but they totalled 11 pips so no big deal.  In fact, I wouldn’t have traded today and would have been $570 worse off for it. 

As from 10pm UK time, I will up our individual trade limit to $200k on forex and 4 futures contracts.  Two trades at a time but asking EQT to monitor 10 markets.  Something I know a human cannot do (and neither can a scanner!!). 

As ever, happy trading.  I will keep you informed of progress.

Meanwhile, enjoy Joe 90.

Why Oscar Wilde would have made a great algo trader

To paraphrase Oscar Wilde, trend-following hedge fund computers know the price of everything, but the value of nothing. This means human investors who focus on value over the long term, rather than price trends, should always be able to profit.

I would agree with that.  But I’m not interested in the long term value of stocks or currencies or commodities.  I’m a trader.  I want to make my return then take my profits and move those money into other investments like property.  

I have traded manually for years at home.  You may ask why when I have worked for banks and hedge funds. Why?  Because the computer power needed to algo trade effectively 10 years ago was over $100k.  Now I am doing it on a water cooled PC that just cost me $4k.

And the results are spectacular.  Full auto trading.  100% machine based trading.

Today for example from Midnight to 4pm UK time the EnigmaSignal auto trader had made 90 pips on GBPAUD alone (see below).  By 9pm that was 150 pips.

How much screen time have I spent doing this?  Zero.  Read that again.  Zero screen time.

Sure I had to set up the parameters.  That took me a couple of hours.

Parameters like:  move stop to break even. minimum profit target, risk: reward ratio etc.

But now I have this strategy set …. the machine will execute the strategy ruthlessly and without emotion.  When I saw a couple of these trades I wondered how in the heck it had taken them.  I could see the setups were good, but I would never have taken them manually. 

And so as we move flat (another parameter for the end of the US markets) I am over 160 pips to the good or put it another way $3200.  Will all days be this good?  Maybe not.  But this was just one currency pair.  

For the first time ever I now feel we truly have the power to deliver a personal algo trading machine for every trader.  To allow you to achieve consistency in your trading to a level that most traders have never seen.  It’s a trip.  Existing users will be upgraded free of charge.  new users will be able to lease or purchase the product.  

For now, the testing continues.  Real money.  Real trades.  Nothing at all is hidden.  Those of you who know the address can screen share and watch it live.  Those that have done so already are ready to be upgraded today!! 

Be patient.  We’re almost there.  We have everything running on Sierra Charts.

Soon we hand the algos over to our Ninja Trader platform programmer.  

By end June we will be live on Sierra and Ninja.  They have the power to handle the complex math.  MT4 is just not up to the job.  Other platforms we will consider in due course.

And finally.  Remeber in all of this, the human is still in the loop.  The machine trades YOUR orders.  Its just trades faster, without emotion and it always follows the rules.  You still need to fit the system to your personality and risk profile.  That’s why all new EnigmaSignal members will still have the opportunity of 1:1 coaching and a complete boot camp course.

At EngimaSignal we dont just backtest the trades.  We backtest the traders.