Wednesday, 27 June 2012

Successfully Trading with an Algo Part 1

As a trader, I adapt to the context of a market. If it opens gap up, I look for certain things and trade in a certain way. If the ES has been going, say, down most of the RTH session, then I may look for a counter trend move about an hour before the end of the session.  While the market is in a trend day up, I just keep buying the pullbacks while it is going up and don't take shorts. This is quite natural as a trader adapts to what is going on.

Many people creating an algo want an algo for all seasons, all days, all types of markets and all contexts. While this is possible, and I have successfully made these, my EXPECTATIONS about its performance must be realistic. As a discretionary trader I may use my, say, $25,000 account to make, say, $1,000 a day. But as an algo trader using that same $25,000, I cannot possibly expect anywhere close to that type of performance. My expectation should be more like $1,000 a month.

Why? Because if I am trying to use an algo for all seasons and reasons I get an average performance and the difference between an average performance - operating at, say, 50% efficiency and a skillfull CP discretionary trader, operating closer to 100% efficiency, would produce that type of difference. An average algo will usually have lower percentage of winning trade, larger drawdowns and larger stops using it's average targets.

Shaving the efficiency and getting unattended trading is not necessarily bad, just a trade off as everything else is in life. Getting a 100% per annum return is pretty good - even 30% consistently is great. Many people would kill for that.

But there are other ways of doing even better than that using an algo and I'll talk about that in another post, Part 2.


  1. Tom,
    I have been reading your blog for some time and I do appreciate the insights you share every day. I do have a nagging skepticism, as I am sure other do as well, about what you are reporting on your own profitability. I have seen your reply to other postings that they ultimately need to believe but in my experience proof builds trust -- not the other way around. Your sharing of selective winning trades does demonstrate some of the concepts to your methodology but it does nothing to reveal the true daily risk of your methodology either. There are only two traders that I know of that fully share their trading idea and post their daily winnings and losses, Barry Taylor at emini watch and Larry Williams. I would consider using your methodology if I saw what your losses or exposure to risk on a daily basis were.

  2. Hi Bill, I think you are missing the most important idea behind what I am saying. TEST and VERIFY your trading. What I achieve in profitability is meaningless as far as what you would achieve. You really will NEVER achieve CP unless you do this. As I said in the first posts to this blog, don't believe anything anyone tells you until you prove it for yourself.

  3. Really decent article, 100% agree...