How To Make Money In 2018 Algorithmic Trading Stock Market
How Automatic Trading Tin can Increment Your Trading Profits
Have you ever wondered how yous tin can automate your trading strategies and increase your trading profits? In this commodity nosotros'll embrace the basics of algorithmic trading (AKA trading bots), the benefits, and the risks. Get set for Automated Trading 101!
A lot of technical analysis involves watching indicators for signals, so trading based on the signals. As I've discussed in a previous article, "I Behaviour That Puts Swell Traders Above The Rest", yous should be noting downwards all of your trades in your trading journal, and equally you gain more feel you should be able to identify the setups that brand you the near money.
What if you could programme a computer to automatically identify these setups and enter trades automagically? What if you could free yourself from the tyranny of the charts?
"Impossible! Applied science can't supersede the skills and feel I've built up over twenty years sat on my ass watching charts all day!"
— Some baby boomer Twitter chartist
Alright, I'll admit information technology. I fabricated that quote up.
You got me.
Haters will say it can't be done, merely they're wrong. It can be washed.
The amount of financial information available is astounding. You tin get the price feed direct from almost cryptocurrency exchanges via their application program interface (API), and, as you might wait, it'south just a bunch of numbers.
Unsurprisingly, computers are style, style, WAAAAAAAAAY amend than humans at doing math. If you tin can place the setups that make you the most money, so can a estimator. Nosotros're talking virtually technical analysis here, not fundamental analysis, that's a whole other kettle of fish.
A guy I keep banging on about, Ed Seykota, had a pretty expert run in the 70s and 80s. He pioneered systems trading, and racked upwards gains of 250,000% over a 16 year period in his model account. And aye, that's the correct number of zeroes.
Those kind of gains are unheard of present. At the advent of computerized trading, he had very lilliputian competition. Gains have been eroded, but you can however make excellent returns from automated trading systems.
Technical assay is the written report of charts. TAs spotter the price looking for patterns, and use indicators to determine marketplace weather. An indicator is but a mathematical function on the price and/or volume of an asset. And a pattern is just a arrangement of prices over a timeframe.
This means a technical trading strategy boils down to numerical assay, and math problems. Computers are much quicker, and more accurate than humans at solving math bug, then why not tell your computer what the rules of the game are and permit information technology trade for you?
What is an algorithm?
The lexicon definition of "algorithm" is:
"A process or set up of rules to be followed in calculations or other problem-solving operations, especially by a computer."
That seems very similar to a technical trading strategy. You find a setup that works well for y'all (e.one thousand. MACD fast line crossing the slow line from bottom-upwardly), and you decide what you're going to exercise about information technology (eastward.g. place a buy market order, with a cease loss 1% beneath the final support level, and close the trade when the MACD lines cross again). That's a simple example, and it's all numerical.
If you tin can place the situations where you lot should open a position, and where you should close a position, then you lot tin tell a computer to do the same affair. Information technology'll be faster and more accurate (assuming you told it to exercise the right thing!).
The benefit becomes clearer if we look at a more advanced case. Suppose you wanted to combine 5 indicators and scan a basket of 7 different assets for a merchandise entry. That's a lot of information the human being heed to handle. You lot'll be switching dorsum and forth between screens looking for your indicators to low-cal upwards green, and telling y'all to get into the market.
The possibility of making a fault is amplified when your attention is split over multiple markets.
This is when a computer shines. The chapters for a computer to handle multiple avails and indicators is much greater than that of any of u.s.. Computers still take their limits, but even a basic personal laptop can outstrip any human when it comes to fast and authentic information analysis.
I hear some of you saying, "Yes, but I can gear up alarms and signals to tell me when the market condition is right!" You tin can. And how do you retrieve the alarms and signals work? They're algorithms.
It's one step removed from algorithmic trading, because the alarms just tell you when the market is in a certain state, they don't handle orders or anything similar that. That part is up to you. Which really is the elementary part of the operation. Why not get an algorithm to exercise all of it? It's cheaper than hiring an assistant.
How are they used in trading?
Besides general automatic trading, there are a few specialized uses for automated trading, including:
- High-Frequency Trading (HFT)
- Arbitrage
- Scalping
- Transaction price reduction
HFT groups execute large volumes of transactions at loftier speed, hence the name, "loftier-frequency". In 2008, after the collapse of Lehman Brothers, in that location was a big concern near liquidity in the stock market place. The NYSE decided to do something about it in 2016. They introduced new incentives for market makers, enticing groups to provide liquidity in the marketplace by offering an boilerplate rebate of $0.0019 for transacting in NYSE- and NYSE MKT-listed securities.
It doesn't sound similar a very large incentive, but if you're making millions of trades every twenty-four hours, the rebates begin to add up. How could a human perchance brand millions of trades a day? And millions of profitable trades at that!
They can't.
Enter, automated trading systems. Past introducing a rebate, the NYSE incentivized the use of HFTs, entities that can brand trading decisions in microseconds, and are rewarded for it.
Some meet it as unethical, because HFTs have a greater reward over non-HFTs. They do, but that just means the residual of the market place needs to adapt to the new players. Suit or dice. The markets are constantly changing, this is just another one of those changes. The world is condign computerized, and there will always be people continuing in the way of progress, because what'southward "progress" for everyone else actually harms these people in the short-term. So it'due south understandable that people would be irked by HFTs.
Merely progress is progress. The jobs that can be automatic will exist automated. We need to deal with that fact. Don't worry, nosotros're not going to dive into a word about automation and the futurity of humanity today.
Allow's get back to automated trading.
Another specialised employ of automated trading systems is to practise arbitrage.
Arbitrage is the simultaneous buying and selling of the same nugget in 2 different markets, whose prices are out of sync. For instance, right now BTCUSD is trading at 7281.50 Kraken, and 7294.10 on Bitfinex. The difference is 12.threescore. If y'all tin can buy BTC on Kraken and sell it on Bitfinex, you can make 12.threescore per BTC, no questions asked.
It's seen as "take a chance-free" because you're ownership and selling the same asset, every bit such the prices should converge somewhen. I said "should", considering this might not ever exist the case.
These price discrepancies might not last very long, considering there are other traders out there watching prices, and hoping to accept advantage of the spread too. So y'all need to exist quick.
And what better way to trade quickly than to programme a computer to practice information technology! Arbitrage bots are seemingly uncomplicated, but go increasingly complex. In that location are many different problems that you wouldn't normally run into in other kinds of trading, such as execution speed. This becomes a problem considering the cost differences won't last long before another arbitrageur capitalizes on the difference. And then it's the fastest finger showtime.
Some trading groups resort to "co-location". This is where the trading company's trading algorithm is hosted on a server in the same edifice as the exchanges servers, and then they can be directly connected with fibre optic cablevision.
When many trading company's do this, the data heart provides off-white conditions for all the groups past using exactly the same length of fibre optic cable to connect each trading group's server to the commutation server. It gets down to that level of detail, that's how high the competition is in this space!
Scalping is some other application. Information technology involves entering trades and endmost them afterward a short fourth dimension in social club to make profits from small toll changes. If you watch a chart for whatsoever liquid asset, even the top 10 cryptocurrencies, you'll see the toll moving constantly. Scalpers profit from this movement.
In a similar vein to HFTs, scalpers make money from scale. If you're making $0.ten per trade, yous demand a helluva lot of trades to make whatsoever significant turn a profit. But with algorithmic scalpers, you lot tin do just that.
Scalping demands quick determination making, something that computers are better suited to than usa humans. Working on brusk timeframes and making short term trades is something that requires the speed and accuracy of a reckoner.
The short timeframes likewise help to limit risk exposure for scalpers, as they're just exposed to market movements for a very brusque flow of time. They don't have to worry about big swings in toll because they're only in the market place for a few minutes at a time.
Smaller per-trade profits are too easier to obtain. Information technology's more likely that the marketplace will motion 0.10 in the same direction than 1.00 in a given timeframe. This makes it easier for scalpers to make profit on every trade. These moves are more frequent too, and then scalpers can brand money even when the market is relatively quiet.
Some may look downwards on scalping equally a lower form of trading, only at the end of the day it's a way to brand money in the market. Maybe you're more than suited to scalping than technical or fundamental analysis? If so, that's groovy. The aim of the game is to make money, not to be the well-nigh intelligent person in the market place, or fifty-fifty the almost skilled.
The concluding type of automated trading that nosotros'll hash out here is transaction cost reduction. Algorithms are used to break large orders down into smaller ones, and then enter them into the market over time to get the best possible price.
Large orders can move the market, so large institutional investors will use automated systems to cut upward their orders into bite-sized pieces that can be absorbed by the market without affecting the price besides much, if at all.
It's a less exciting utilise of algorithms in trading, but it's very necessary, and it'south another example of a job that is much ameliorate done by a computer than a human.
Why would anyone use a trading algorithm?
Nosotros've discussed some of the advantages of automated trading systems already. I want to reiterate those hither and go into a little more detail.
Computers are faster than humans at processing data. They're designed to do math. Our brains evolved to detect danger, and flee or fight information technology. Computers will beat united states of america in every math contest. They're faster and more accurate.
This allows computers to make decisions and human activity on them much quicker than we tin. Perfect for monitoring 1 minute charts in trading, and taking action as before long as the market shows signs of making a move.
Imagine trying to monitor the ane minute charts of even the top 5 cryptocurrencies, watching the price action of each, and monitoring signals from multiple indicators. How likely is information technology that you'll be able to capitalize on every opportunity that comes your fashion? Non very.
It'd be a cakewalk for your silicon-brained friend.
Automated trading systems can be used to cheaply calibration your operation as well. Imagine if you lot had to hire another trader or trading banana every time y'all wanted to enter a new market. Your attending is express, and there's simply so much the human brain can concentrate on at one time.
If you're trading cryptocurrencies and desire to expand into forex, then you're going to need aid. Automatic trading systems tin can provide this. If you understand the rules you lot trade by, and can formulate your crypto strategy, and so yous can make an automatic trading arrangement to handle that aspect of your business. Leaving you free to focus on your foray into forex.
You can rinse and repeat this cycle as many times as yous want, setting upwards automatic systems in each market to handle your trading activities.
If you're ill of staring at charts all 24-hour interval, and yous don't want to trade anymore, and then you lot can program a system to practice it for you while you focus on something more fulfilling.
Nosotros know you'll be back though. At that place's a reason you started trading, and it'll draw y'all back to the marketplace eventually.
Are there any downsides?
I've made information technology seem all rosy in the globe of automated trading systems, merely information technology ain't.
One of the major upsides of automated trading is also it's Achille'south heel. If computers can make winning trades very quickly, they can make losing trades only equally quickly. If the system starts to enter into losing positions, it'll exercise so very quickly, and you lot might stack up substantial gains before you know what happened.
One way to mitigate this is through the utilize of proper risk management practices. A trading system can merely practice what you tell information technology to exercise, so if there'southward a scenario that you oasis't thought of (information technology's VERY likely that you won't think of everything) the trading arrangement will go along to use the rules you prepare even if it'll cause y'all to lose money.
Risk direction rules can help here. You could set terminate-loss limits on each trade, e.g. close position at v% loss, and fifty-fifty shutdown the trading system if the drawdown exceeds a given value. These practices can assistance to ensure you don't lose your whole trading stake from a few bad trades. Because when it happens, it'll happen faster than you can say "Long Term Capital Management".
Automated trading systems tend to be inflexible.The estimator can simply do what yous tell it to do, sometimes people recall they've told information technology to do i thing, when they actually told information technology to do another, "The damn machine isn't doing what I told it!". But information technology's not possible for the machine to do anything other than what y'all told it to practice (I'm not talking well-nigh AI hither, as that's another kettle of fish).
Then when the market changes, your algorithm might, and probably volition, demand to be updated.
The 2010 Wink Crash is a prime example of the dangers of automated trading.
On May 6, 2010, a trillion-dollar stock market crash started at 2:32 pm EDT, lasting about 36 minutes. Some of the major stock indices in the The states, such equally the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Blended, promptly crashed and regained their losses in quick succession.
It'southward known as the "Flash Crash". The DJIA suffered the 2d biggest intraday point drib in history! Information technology lost 998.5 points within a few minutes. That'due south a 9% drop! Luckily it wasn't sustained, and the index recovered near of the losses inside a few more minutes.
The crash was, in part, caused past automatic trading systems, namely HFTs.
It was institute that a big fundamental trading house, Waddell & Reed Financial Inc., had entered an social club to sell 75,000 Eastward-Mini S&P contracts (~$iv.1 billion worth). This was an unusually high volume, and was quickly swallowed by HFTs buying the contracts.
Just as chop-chop as they'd bought the contracts, the automated trading systems sold the contracts again. The Wall Street Journal quoted the official report into the incident, stating:
"'HFTs [and then] began to rapidly buy and and so resell contracts to each other — generating a 'hot-potato' volume effect equally the same positions were passed rapidly dorsum and forth.'"
While this was going on in the futures market, the effect spilled over into the equities market, probably due to arbitrageurs taking advantage of the cost departure betwixt S&P 500 stocks and the E-mini S&P contracts. Stock prices went awry, with companies such as Accenture and P&K trading at pennies or $100,000! The globe had gone mad!
The debacle was ended when, every bit the official written report states:
"At two:45:28 p.m., trading on the E-Mini was paused for five seconds when the Chicago Mercantile Exchange ('CME') Stop Logic Functionality was triggered in lodge to prevent a cascade of further price declines. In that brusk catamenia of time, sell-side force per unit area in the E-Mini was partly alleviated and purchase-side interest increased. When trading resumed at 2:45:33 p.m., prices stabilized and shortly thereafter, the E-Mini began to recover, followed by the SPY".
Equally I've already stated, computers can make decisions and act on them much faster than we can. They can play a big part in exacerbating market events such equally this. Who could predict earlier-the-fact that the automatic trading systems would react in this way to such an event? I doubtfulness many people, if anyone at all.
You cannot, and should not endeavor to, predict what is going to happen. Simply exist prepared for the general cases: the market place goes up quickly, the market goes down quickly.
How can I brand coin from trading algorithms?
In Ed Seykota's early on days, he programmed trading algorithms onto punch cards that were read by a reckoner! Luckily trading technology has come a long manner since then. At present anyone with basic programming skills can whip upwards a trading algorithm.
If yous have a trading system, whether that'south based on indicator signals, pure toll action, or other technical analysis, you lot can write a curt script to monitor your chosen indicators and human action on them. If you don't have programming skills, then contract out the task on a platform like UpWork.
There are a few trading platforms around that permit you to write your own trading algorithm, and integrate information technology with their infrastructure. You don't need to worry about connecting to exchange APIs, how to calculate profit and loss, or even how to execute orders. These systems have solved all those problems, and so you can piece of work on the loftier-value aspect of your trading performance, the algorithm itself.
Some of the platforms that are available include:
- Catalyst (my platform of pick)
- HAASONLINE
- Gekko
- TradingView
- Quantopian (non-crypto)
Quantopian doesn't support cryptocurrencies, simply I thought I'd add it in because it's the most advanced of all these systems. Catalyst was forked from the technology underlying Quantopian, but differs because they're focused exclusively on cryptocurrencies. It's the system I employ at present. Both are written in Python.
I haven't tried HAASONLINE because it'southward a paid service, but I thought I'd add it to show what other types of solutions are available now. And Gekko is an alternative written in Javascript. I don't think information technology's as polished as Catalyst, just it does provide some skilful features.
One thing Catalyst, Gekko, and TradingView have in common is backtesting. Both systems allow y'all to download historical price data from exchanges, and test your algorithm over a period of time in the past.
This is swell for developing your algorithm and honing information technology. On Goad, depending on the pair you want to test against, you can trade from former in March 2015 up until yesterday, and any period in betwixt. You can backtest equally much equally you like, without risking any coin, until you're happy with the results.
TradingView has a very simple scripting language called Pine, that you can use fifty-fifty if you accept no experience in programming. It's very straightforward, and tin can be your gateway into automatic trading.
Exist aware, excessive backtesting can crusade you lot to overfit your strategy to the historical data. That is your algorithm may work perfectly for the price action from Jun 2017 to Dec 2017, gaining you lot iii,000% (woah!) but it might only work for that period of time. Marketplace conditions are constantly changing, and then y'all can't rely on backtesting to give you the perfect algorithm.
A strategy I'm trying out now to hone my algorithm is to utilize a Monte Carlo simulator to generate random prices for the next year, then piping those into Goad, and run my algorithm against that dataset. This way, I can examination my algorithm confronting an unlimited number of possible hereafter scenarios.
I'k not going to go into the details now, just basically I utilise the historical volatility to generate prices.
No need to get technical right abroad though. Backtesting will suffice to begin with.
One time you take a strategy that's been tested, you should test it with a paper trader and alive data, to ensure in that location are no issues in switching from the backtesting system to the live trading system. Yous don't want a programming error to cause you to lose your whole stake in the start twenty-four hours!
If you're happy that your strategy is working well with live data, so become ahead, open up trading accounts, eolith some trading majuscule, and beginning your trading bot.
In that location y'all have it, the nuts of automatic trading. Seems uncomplicated, eh?
Automated trading is a great tool to take in your trading toolkit, I'd say the hardest matter about information technology is codifying your strategy. Converting your strategy into code that a computer can interpret tin can be very hard, but totally doable if you put your mind to information technology.
Don't forget that the risks in discretionary trading are amplified by automatic trading. Your bot tin only do what you tell it to do, then if market weather condition cause information technology to enter losing positions, it'south gonna enter losing positions, and quickly! These losses can mount upwardly and then take proper risk management systems in place:
- Set a max drawdown limit that'll kill the bot if it'due south triggered
- Use stop losses on EVERY Merchandise
There's a lot of work required upfront when developing a system, just the time you'll salvage in the long run is invaluable. That time tin be spent on reviewing the performance of your trading bot, designing improvements to your system, building more bots to boost your profits, or just kicking back with an Old Fashioned on a embankment in Barbados. Practice whatever you desire, you earned it.
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DISCLAIMER:The information in this article is provided for educational purposes only. I am non a fiscal counselor and this article does not incorporate financial advice. Make your own decisions almost risk, or consultant a professional financial counselor.
Source: https://medium.datadriveninvestor.com/how-automated-trading-can-increase-your-trading-profits-371ae1f828fe
Posted by: kramerentin1949.blogspot.com
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