Automated Systems of Trade
Table of Contents
- 1 Automated Systems of Trade
- 2 Orientation of the system
- 3 Following the trend
- 4 System of the break
- 5 System for trading in range
- 6 Techniques of filtering
- 7 Positioning on the market
- 8 Putting sliding stops
- 9 Second entering the market or turning the direction
- 10 Practical application – How to make our own trade system?
- 11 Defining the purposes
- 12 Finished strategy for trading
- 13 Managing the capital and the risk
- 14 Positioning (Choice of deal)
- 15 Business plan of the trader
- 16 Reasons for trading
- 17 First principles – Available resources
- 18 Psychological consideration
- 19 Trader types
- 20 Traded timetables
- 21 Rules of the trader
- Orientation of the system
- Techniques of filtering
- Positioning on the market
- Primary risk management
- Putting sliding stops
- Second entry on the market or methodology of turning the direction
Orientation of the system
There are 3 main types of systems for trading:
Following the trend
In this case the trade is in advantage of the dominant market trend. We need to defy the current trend with help of a rule or a couple of rules when there is such
System of the break
System that follows the direction of the break and going out of the consolidation or a period of range. For instance when the market goes out of a rectangular or a triangle.
System for trading in range
System specially developed for making a profit from periods when the market is stuck in a definite course range.
Many professional institutional traders – especially these who move the market (market makers) or they are oriented short term – have different systems that reflect every one of the already mentioned styles, so they can be ready to participate by every market conditions.
Techniques of filtering
The simplest filters guarantee expelling of the generated signals for trading if the trend or another factor is unfavorable. On a higher level the filtering may include selecting between different signals in favor of the strongest one. The key by the filtering is to reduce the number of the wrong signals usually indicators like RSI, ROC and Stochastic are used
Positioning on the market
Strict rules are defined that give clear mathematical signals without leaving any opportunity for human interpretation
Putting sliding stops
Going out of position – Happens in result of activating of one or a few stops, reaching the wanted goal, change in the main trend etc
Second entering the market or turning the direction
Some systems like these using sliding middles impose a persistent presence of the traders on the market. A generated signal for selling requires the closing of open long positions and at the same time opening of new short positions
Alternatively, more perfect systems often include methodology for second positioning on the market that when the primary position has been closed with failure doesn’t wait for the coming change in the trend but requires by a certain signal a second entry on the market in direction of the primary position (closed with a stop policy)
It’s not hard to identify the simplest traps by composing systems of trade. The first and most important is the number of rules that will be the model for trading. The simpler they are the better.
Secondly, filtering, even an advantage, can turn into a hard task. What we should not forget is that no matter how long we try to filter the inaccurate signals it’s not possible that the system avoids all the losing deals. The adding of too many filters will decrease a lot the number of the trade deals and will result in a too mixed-up control system.
As rules the professional traders don’t use more than 5 filters as an absolute maximum.
Finally, we should remember a very important moment, confirmed by experienced system designers. The end result from our system design should be an enough simple methodology, understandable even for the unprofessional traders.
Practical application – How to make our own trade system?
The first step is to know the structure. This means that the goal is clear. What do we want it to do? Do we want it to catch the trends? Or do we want to trade in range? What’s the risk? What is the expected success?
Some of these parameters will have an impact on each other. For instance, if the stop orders are too close to the level of positioning the successfulness (the number of the successful deals) will decrease. But as long as we have realistic expectations there is no reason to doubt their realization. After we have decided what we want the system to do the next step is to observe.
Defining the purposes
What kind of signals are we going to use for defining the market?
- System for controlling the risk and the capital – Shows how long we can risk in every single deal and to choose politic for placing stop orders and size of the position we use.
- Choice of strategy for positioning
- Management of the levels of the stop orders (using sliding stop orders)
- Strategy for leaving the market
The politic of placing stop orders is basic for every system. The connection between the level of positioning and the level of the order (for getting out of position) defines the system
Placing stop order has main meaning. If it is harmable it makes the system harmable as well. This brings us to the conception for stability of the analyzed rate values. More long-termed database is more stable and gives better signals. From other side more long-termed trade brings to using wider stop orders and that way either will raise the risk either we are going to have to trade with less count of contracts.
Here is the great dilemma. If you want your money to go round all the time you will choose short-termed system for trading. This way more unstable database will be used and bigger failed deals will be realized. Better systems are long termed orientated. But most of the traders are in paragraph 22. They trade exactly because they don’t have enough money and use trading as a way to get richer. They are made to use systems for short-termed trading because they can’t afford to react to the long-termed signals and are too hurried to wait appearing of such signals.
These who are rich respect the money and that’s why they trade carefully (using systems for long-termed trading) and can wait the signal.
Most of the traders have little respect to the money and until they learn to respect them they are probably broke.
In spite of the time of trading the system design is not different except for that – usually more long-termed systems are trends because in long-termed plan markets show ability to move in exact direction.
Finished strategy for trading
Successful trade on the financial markets is simple thing. There are several rules that must be followed and then the process is not difficult for understanding.
Reasons that stop us from success are the difficulty to follow these rules. Following the rules is against the essence of the human nature that has been evolving thousands and millions of years and shows its great influence on us. While the fight to get over these problems is something permanent in this game there are methods that help to make emotional and to succeed.
By reducing the probability of having bad influences we can easily follow the rules.
They can be categorized like that:
Managing the capital and the risk
No doubt you hear about the importance of this. Why after all we break these rules? It’s very easy to define exact and clear rules for control of the risk which are suitable for the case of every trader.
There is a moment in every rule when following it is so hard that the breaking of the rule can’t be avoided. Raising the leverage makes exactly this – we can rise it to some level and to follow the rules for control of the risk but if we pass the critical point following of whatever discipline becomes impossible.
Every trader has his own line of market attitude, different parameter for maximum admissible value of leverage.
The process of calculating where the line must be, should follow the same logic for every trader.
- We choose what lost as a percent of the capital we will feel comfortable if the positioning of the market is wrong. How this percent appears in dollars?
- Watching the currency that we trade and according to the style of trading we choose what the realistic size of the stop orders that can secure the safety of the deal is.
- The answer of 2 will give us the dollar sum of contract. For example 80 pips in Euro = 80 dollars. After that we go to the answer of 1. If in this example the acceptable lost is fewer than 80 dollars there is a problem. We won’t be able to follow the rules.
This is maybe the biggest and main reason for failure of new traders – they trade with big leverage and following the rules becomes impossible.
Positioning (Choice of deal)
It is important every trader to choose the timetable by himself so he can feel comfortable. There aren’t right and wrong timetables. There are suitable and unsuitable. They must be consistent with the personal characteristics of everyone.
After we choose the timetable we use a form of analysis. Most of the methods bring different signals of trading from perfect to poor.
Discipline and self-control are needed to manage the enthusiasm for trading and decrease the positioning of weaker signals and getting in of future deals.
Business plan of the trader
The purpose of the business plan is to create successive model for successful following of the purposes of every trader.
- Balance of the trader
- Why do we want to trade and what exactly do you want to achieve
- Ambition – purposes of the program for trading
- Method of trading
- What kind of approach is used for achieving of these purposes – description of the timetables that will be trade (during the day, short-termed, middle-termed, or long-termed) – defining at the same time what these terminus mean for you.
The leading in of this bureaucracy is a charity process. As a beginning the business plan shows how your trade will look like and how your ambitions will cooperate with your abilities having in mind your resources.
A good business plan can be fitted on 1 page. It definitely mustn’t be bigger than 2 pages. The key is the plan to be understandable so if needed for short time to be learnt again. The business plan is excellent method for self-analysis.
Our expectations can become unrealistic. It is always good to analyze our pros and cons because they certainly will be attacked at one part of our carrier as traders. Rereading the business plan will give us support during hard times. The methods of trading are the most important part of the document. The plan can always be revised and it is good to be reread once in the month.
Reasons for trading
The reasons may sound strange but we have to be successive in following them. They must be explained clearly so the trading have to have certain situation which if it falls apart means end of the reason for the deal.
This is connected to 4 main components:
Proportion risk/profit – In position trading it must be 1/3 in benefit of the trader.
Level of entry – must follow certain criterions. If there are such we take position. If not we don’t trade.
Maximum risk of deal – level of leaving the market. If and how to use stop orders? Expected level of closing with profit.
Health – the best traders have good physical and psychical health. Making a fitness program that can be imported in the working week will be good thing.
Free time – to relax properly when you are out of the dealing room.
After you write the business plan leave it for a couple of days to stay in your brain. After that revising the written if needed make realization.
First principles – Available resources
As private investors the situation is simpler. The trader is disturbed by the time that he will spend trading and the capitalization of the accounts for trading. If you have full-time job trading during the day will be hard, even impossible. Then using a system for daily and weakly signals will be recommendable because it needs less handy and can be check every evening after work.
Analogically for the capital if it is participated with small sum it shouldn’t be counted on luck. Historical test of the system is recommended.
You have to know what you are capable of – in other case you will create a system that won’t be for you.
If you create volatility system that brings to often shaking and big movement of the capital – when you want safety for your money secured by little profits with low risk – this system is not proper for you.
If you trade for fun this is a bad news. A system won’t give you the same thrill as your own decisions. But this is the purpose of the system. From other side it can help you make more dollars but remember – interesting life has nothing in common with the good trading. The system helps for automating of your decision and low down the size of the unavoidable mistakes.
Expected result – It is possible to have high result by a system but we shouldn’t expect miracles. We always must have rational expectations for the result of a system.
Routine handy – All the systems need handy, that’s why your plan must include idea what period of time you can afford to make the needed check.
System parameters – They are connected to the psychological criterions. Systems with admissible lost over 20% are rejected.
- Traded timetables – It is not necessary a working system to give results of everyone who uses it. The main reason for this is that everyone has different levels of tolerance while working with particular tools, timetables, steppe of volatility, level of risk and etc.
- Individual types
- Mathematical type – This individual type is characterized with belief in the rules of the mathematic and examines the money as a number values without showing any emotions and estimations. For him the money has no value except as a final result of equation showing possibility for a profit. This type of traders is sure that they will win money only if they follow the generated signals. Distance from emotional excitement during trading and from the emotion of the profit. He is interested in the profit of the numbers; he can trade trend or oscillation systems.
- Intuitional type – Opposite the mathematical type, although both types can be as well intelligent and interested in using the mechanical aspect of trading. The mathematical type is ruled by the left part of the brain which explains it’s precisely, unemotional and lineal thinking. Intuitional trader is ruled by the right part of the brain which explains the illogical, intuitional, emotional feelings. This type of traders learns to use intuitional talents for making money and is able to put their emotional power for more effective trading. This type can and often uses mechanical system for trading but puts intuitional indicator.
- Gambling type – Needs to feel instantly satisfaction from the rising tide of adrenalin. Suffer from confusing signals from both parts of the brain. He is too impulsive to keep emotional distance during trading and this doesn’t allow him to trade using intuitional signals. Tolerate systems including high risk, high volatility, short timetables and often losses. Even he is able to show moment greatness this type usually is not proper for trading because of the missing inside discipline and his need for realizing big profits instead of securing a stable income of middle profits.
Day traders – Don’t leave open positions for the next day; the sense of control over the situation is strong. Love and need fast profits and lot of operatively to make them. Dynamic people but showing insecure sometimes.
Position traders – Have more confidence than the day traders. Usually trade with more money. They are able to get through different stages of long-termed trading, usually have opinion about the market. Usually use trend strategies, sliding averages, oscillators.
Sources of the money – The question about the source of the money that we trade with is basic and must be addressed by psychological, personal aspect. Every man feels different when he trades with money that are not his own and this is based on the individual type of the person. It is wrong to trade with money if you don’t feel comfortable because the guilty, scare and the discomfort can restrict or harm the results.
Personal money – Traders who feel best when trade with own money mist wait until they have enough capital for managing. They should threat their capital as amount available.
Another’s money – Needs responsibility and you mustn’t be emotional.
Sources of another’s money can be:
- Individual investors
- Institutional investors
- Money of the employer
Rules of the trader
Basic rules of the trader are:
- Health: Trade during health problems is not recommended because it can ruin the psychical condition needed for successful trading.
- Partnership: Always participate by your own.
- Limiting the losses.
- Losses. Inserting risk parameters.