- Algorithmic trading is bad!
- It's robot trading without supervision.
- It's gambling thinking you can make money from doing nothing.
- It's impossible to quantify human emotion.
So these are a few quotes one hears when the discussion of automated algorithmic trading comes up.However are these findings unjust?
Most of the time it's due to the fact that the individuals attempting to create these systems do not have the required training and experience.
Anyone can purchase a surgical blade and a mask, does that make them a Neurosurgeon?
Let's use the Neurosurgeon comparison.
Step 1
Firstly for any person wanting to become a doctor they need to come to grips with the human body. With such a wide body of knowledge in the medical field this requires hours of study in front of books familiarizing oneself with topics such as anatomy and chemistry .Same goes for the algo trader. Hours spent breaking down all the formulas to first principles. The algo trader needs to understand every formula so well that if x in the formula changes the consequences of the affects to the output of y are known. And yes there are thousands of formulas.
Step 2
Practical experience in a mock emergency room to train how to deal with real life situations and assisting other qualified doctors. The algo trader needs to not only have a paper trading account but also needs to find a mentor to guide them. This mentor should have a good understanding of the underlying factors affecting markets and most importantly how to maintain composure in stressful situations.
Step 3
After qualifying the doctor will begin to practice as a general practitioner before specialising in surgery. They will treat various ailments and figure out which niche within the medical field that they feel most comfortable with. The algo trader should look at how to apply the skill sets they have acquired. Spending time on finding the instruments and sectors that best appeals to their interests. One will always need to understand the bigger picture and keep that knowledge refreshed.
After qualifying the doctor will begin to practice as a general practitioner before specialising in surgery. They will treat various ailments and figure out which niche within the medical field that they feel most comfortable with. The algo trader should look at how to apply the skill sets they have acquired. Spending time on finding the instruments and sectors that best appeals to their interests. One will always need to understand the bigger picture and keep that knowledge refreshed.
Step 4
Specialisation into surgery and later focusing on Neuro surgery.
Only at this point does the algo trader start to put together his formulas and systems into an automated program.There are many ways to do this. One could be to outright code a system using a computer language such as c++ or delphi. Another option is to use software like matlab to put formulas into. When you get to this stage it is highly unlikely that you would want to use the standard formulas that generic systems can offer as you become specialised.
Specialisation into surgery and later focusing on Neuro surgery.
Only at this point does the algo trader start to put together his formulas and systems into an automated program.There are many ways to do this. One could be to outright code a system using a computer language such as c++ or delphi. Another option is to use software like matlab to put formulas into. When you get to this stage it is highly unlikely that you would want to use the standard formulas that generic systems can offer as you become specialised.
Step 5
Fellowship year for a specialist is becoming a must in the medical field.
The algo traders equivalent is understanding the backtesting drawbacks. Things such as curve fitting, limited data, statistical bias, real time slippage and execution cost factors all contribute heavily to profitability and it's of utmost importance to concentrate and understand them thoroughly.
Blog by: Al the Algo Trader
Edited by: CadeTradeR
Fellowship year for a specialist is becoming a must in the medical field.
The algo traders equivalent is understanding the backtesting drawbacks. Things such as curve fitting, limited data, statistical bias, real time slippage and execution cost factors all contribute heavily to profitability and it's of utmost importance to concentrate and understand them thoroughly.
Blog by: Al the Algo Trader
Edited by: CadeTradeR
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